What is the Emerging Market Economy? Role and Importance

When an economy of a developing nation starts to engage more with the global market, it is often referred to as an emerging market economy. Such an economy consists of various characteristics of a developed market, but not all.

If you look at these characteristics of a developed market, they have strong economic growth, high per capita income, liquid equity, and debt market, attract more foreign investors and have a dependable regulatory system.

When an economy starts integrating more with the global economy, it is termed an emerging market economy. The integration includes:

1. Increased liquidity in the local debt and equity market.
2. An increase in trade volume and foreign direct investment.
3. The development of modern financial and regulatory institutions.
4. If we simplify an emerging market economy, the economy of a developing nation is on the path to becoming more advanced.
5. Despite having middle and low per capita income, emerging markets significantly expand due to high production levels and industrialization.
6. Emerging market economies cover 80% of the world's population, contributing 70% of the world's GDP growth.

Why the Emerging Market Economies are important?

Emerging economies are very important as they are embedded with unique features. 

1. Abundant resources and home to cheap labor: The emerging market countries have a lot of valuable natural resources like minerals and cover almost 80% of the world's population. This also makes them home to cheap laborers, which draws more businesses from around the world to access these resources and higher low-cost laborers. This brings more job and investment opportunities to these economies.

2. Growth in international trade: As the emerging market economies are rich in natural resources, they get more engaged in international trade. They trade resources, technology knowledge, and capital, increasing these countries' exports.

3. High economic growth: Emerging markets are very active and efficient. They witness strong economic growth with moderate per capita income. The per capita income is lower than in developed countries but not as low as in underdeveloped countries. This unique feature also makes them the fastest-growing economies in the world.

4. Investment opportunities: Emerging markets are the best investment options for foreign investors who find profitable and beneficial businesses due to the cheap availability of resources, labour and incentives.

5. Moderate to high risk: Emerging market economies often fall in the moderate to high-risk category as these countries are still developing, and the market is very unpredictable.

What is the role of emerging markets in the global economy?

Emerging markets play an important role in the global economy. It is more promising in every aspect of the global world.

1. The big picture:  India and China house most of the world's population. Unique to India is its booming youth population. These rising economies go through big transformation. This transformation leads to urbanization and a huge movement of people from rural to urban areas. Growth in these economies is re­markable. Many cities in India have populations that can match the populations of some countries. These emerging market countries add a significant demographic element to the world economy.

2. Important in economic terms: They comprise 40% of the world's GDP measured at purchasing power parity. They are the engine of the world economy. They continue to grow, especially when other parts of the world slow down.

1. The standard of living in these countries has improved because of fast growth.
2. These growing economies rapidly integrate with the global markets for products and services.
3. Think about this: Of the world's 20 largest companies by market value, many are from emerging countries. Plus, the count of millionaires in these nations is on the rise.

3. Long-term outlook: The future of emerging market economies is brighter because of the long-term growth. This growth is based on the demographic trend, capital accumulation, and productivity model. These point out that emerging markets greatly affect the global economy.

1. In 2050, China could lead all economies globally, and India will become third after the U.S. economy.
2. India will revert back to its original position on the world stage and become the biggest global economic power once more for the first time since the Industrial Revolution.
3. However, it should be noted that in order for these goals to be met, there is a need for continued monitoring and international partnerships.

4. The Euro area: Emerging markets constitute vital parts of the European Central Banks as euro areas are continuously involved in trading with the emerging markets. It refers to a particular region of Europe known as the Euro area, an economic block comprising numerous member states that utilize the euro as their single currency.

New emerging economies are satisfying the growing demand for goods and services in the euro area.

1. Development in emerging economies opens doors for the euro area. European nations trade even more with these countries than the U.S. and Japan.
2. The trade between euro areas and emerging markets of Asia, Russia, and Eastern European economies has grown substantially.
3. The new economic powers, such as Brazil, Russia, India, and China, view the Eurozone as a promising place for investments.

Top 10 Emerging market Economy in the world 

Here's the list of the top 10 most promising emerging market economies in the world:

1. China-World's second-largest economy: China's economy has rebounded after the COVID-19 pandemic. China has successfully held all the aces despite this prolonged lockdown. 

1. Its GDP for 2023 is expected to be $19.37 trillion, equal to 18.43% of the world's GDP. 
2. By 2028, its GDP can touch the astounding mark of $27.5 trillion, which will be  20.5% of the global GDP.
3. China is still in a fix as many countries are looking to decrease their dependency on China for manufacturing and searching for other options.
4. China's real estate market bubble has burst, and he needs to fix it quickly.

Also Read: USA vs China GDP

2. India- World's youthful country: India has strong fundamentals, disciplined fiscal policies, strong domestic demand, and political stability. 

1. India is continuously increasing its spending on infrastructure. Today, India is a consumption-led economy which boosts growth and competition. 
2. By 2028, India's nominal GDP will be $5.57 trillion, currently at the mark of $3.76 trillion. It will also lead India to the world's third-largest economy.

3. Brazil- Largest Economy in Latin America: Brazil is home to more than 60% of the Amazon rainforest. Rising global demand, strong prices, and technology mainly drive Brazil's economy.

1.  It is the 10th largest economy, with a GDP of $2.08 trillion.
2.  By 2028,  its GDP will be around $2.75 trillion, making it the world's largest economy.
3.  Despite a promising future, Brazil is currently going through various issues like public corruption standards, political issues, inflation and unemployment, and income equality, laying the economy in a can of worms.

4. South Korea is a hub for innovation and technology:  South Korea is home to famous companies like Samsung Electronics,  Hyundai Motors,  Kia Motors, POSCO, and many more. 

1.  It is a war-devastated nation that is swiftly moving towards a trillion-dollar club economy.
2.  Its GDP is expected to reach $2.12 trillion by 2028, and it is currently at $2.12 trillion. This makes it the 12th largest economy.

5. Mexico is a cultural and resourceful country:  It is the second largest economy in Latin America and has $6.1 billion barrels of oil reserves (proven). It is an OPEC Nation. Not be surprised because it is also an upper-middle income economy. 

•  By 2028, its economy is expected to reach two trillion, currently $1.67 trillion.
•  The reason for this slow growth is that 44% of the population is poor, and its oil production is continuously declining.

6. Indonesia is the world's largest archipelago:   It is the 15th largest economy in the world and the largest economy in Southeast Asia. The country adopted corrective policies, which proved to be its guardian angel and protected its economy during the 2008 financial crisis.

1.  Indonesia is in the final phase of completing the 20-year development plan.
2.  Its GDP can reach the mark of two trillion dollars by 2028, which currently stands at $1.39 trillion.

7. Saudi Arabia: the world's largest producer and exporter of oil:  The Saudi economy mainly runs on oil and petroleum exports. Due to its dependency on oil, Saudi Arabia is continuously trying to diversify its economy.

• The other drivers of its economy are retail trade, construction, and transportation activities.
• The country is projected to reach $1.25 trillion by 2028, currently at $1.06 trillion.

8. Turkey: soon to join a 'trillion-dollar economy' club:  It is the 19th largest economy in the world and perfectly fits in the category of upper to middle-income. 

1. The unemployment rate in the country is expected to stay at 10%,  and the inflation will remain above 40%. These estimates make it challenging for Turkey to join the 'trillion dollar economy' club soon. 
2. By 2028, the economy will grow to $1.3 trillion, currently around $905.52 billion.

9. Taiwan- the semiconductor world:  Taiwan holds an important position in the global economy that entered the high-tech world in the  1980s. It is a high-income economy with a Monopoly over semiconductor Technology. Currently, its GDP is $790 billion, which can cross the awaited mark of one trillion dollars by 2029.

10. Poland: home to one million refugees from Ukraine:  The Polish economy is the best example of slow and steady wins in the race. By 2028, Poland will join the trillion-dollar economic club, which currently has a GDP of $748.88 billion.

What happens to emerging markets when rates rise? 

• When the interest rates in the U.S. rise, it becomes costly for emerging markets to pay off their debts in U.S. dollars. 
• Compared to the currency of the U.S.,  the currencies of emerging market economies lose their value as the interest rate rises.
• As the currencies of the emerging market economy lose their value against the Dollar,  their product becomes more expensive for U.S. customers, which drops the demand for the product and export.
• It is important to note that investor lose their interest in the economies and take out their money, which badly impact them. 

Do emerging markets do well in the recession? 

Recession is not a good sign for any economy. Still, sometimes emerging economies can leave a mark because as the prices of commodities like crude oil and petroleum decrease, they also keep the prices of goods and services low.

The prices of assets like real estate and stocks reduce drastically, but the impact is more severe in developed countries than in emerging countries.

1. As the value of currencies of emerging countries declines, it helps them to prevent a significant decrease in the volume of exports. Due to this, their product remains competitive in the international market.
2. As the value of currencies declines, developed countries purchase more goods and services from emerging economies.
3. It is also evident that during the previous recessions, emerging economies have done better than the developed nations.

Bottom Line

Emerging market economies are those economies that are moving forward to become developed economies. They have rapid growth and provide greater returns that attract more investors, but most emerging economies face the risk of political instability or currency fluctuations. Emerging economies are important due to abundant resources,  more investment opportunities and high economic growth. These economies play an important role in the global economy as they hold more than half of the demographic profile of the globe. Most developed nations see emerging economies as their best destination for investment.

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