What do we mean by the term emerging markets?
What do we mean by the term emerging markets? Who are they? What defines them? What role will they play in the world over the next 30 years?
Emerging markets are defined as states with social or business activity in the time of fast growth and industrialization. Nowadays there are about 28 emerging markets in the world, and economies of such countries as China and India are to be mentioned as two of the largest. The term "less economically developed countries" indicated markets of the countries which were less "developed" due to different objective or subjective factors in comparison with the developed countries such as the United States of America, Western Europe, and Japan (Jain, 2006). These markets were believed to have greater potential for profit, but at the same time more risk from different factors.
This term was considered as to be not positive enough that is why there was created new terms for such markets - emerging market. Sometimes this terms can be used in order to replace emerging economies, but its main meaning should be a business phenomenon that is not fully described or compressed by geography or economic strength; such nations are considered to be in a stage of transition from developing to developed status. For example, nowadays there are the following emerging markets, such as China, India, some countries of Latin America, i.e. Brazil and Mexico, some countries in Southeast Asia, most countries in Eastern Europe, Russia, some countries in the Middle East (especially in the Persian Gulf Arab States), and parts of Africa (especially South Africa) (Allen & Gale, 1994).
Moreover, emerging economies are the most rapidly growing economies in the world, which make a great contribution into the world's explosive growth of trade. They say that by 2020, the share of the five biggest emerging markets' of world production will double to 16.1 percent from 7.8 percent in 1992 (Bleakley & Cowan, 2004). The emerging markets will also become more important buyers of goods and services than industrialized states. Besides, they are take important part in the world's main political, economic, and social affairs.
There are two kinds of emerging markets: Advanced and Secondary, which are determined on the grounds of the national income and the development of market infrastructure of the certain country. The Advanced Emerging markets are determined so because they are Upper Middle Income GNI countries having advanced market infrastructures or High Income GNI countries with lesser developed market infrastructures (Pettis, 2001). To the Advanced Emerging markets belong such countries as Mexico, Brazil, Hungary, Poland, South Africa, Taiwan.
The Secondary Emerging markets are some Upper Middle, Lower Middle and Low Income GNI countries with reasonable market infrastructures and important size and some Upper Middle Income GNI countries with lesser developed market infrastructures (Schmukler & Vesperoni, 2006). The following countries can belong to the Secondary Emerging markets: Chile, China, Colombia, Czech Republic, Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, Philippines, Russia, Thailand, Turkey, UAE.
The emerging markets can be determined due to four main characteristics. Such countries are regional economic sources of energy with large populations, having large resource bases, and large markets. Later their economic success will stimulate the development in the other countries around them; but in case such countries will undergo an economic crisis, they can bring their neighbouring countries down with them. Such markets are transitional nations that launch domestic economic and political reforms. They take over open door policies in order to supersede their traditional state interventionist policies which were not able to generate a steady economic growth of the country.
The emerging markets can be created in two situations: the failure of state-led economic development and the necessity of capital investment. First, state-led economic development did not manage to produce a considerable growth in the traditional developing countries. This default and its huge negative impact drew those countries to take over open door policies, and to shift from the state's being in charge of the economy to facilitating economic growth along market-oriented lines (Bennett, 2002).
Besides, the developing counties extremely needed money to finance their development, but the traditional government borrowing was not sufficient to sponsor the development process. In the past, the governments of the developing countries borrowed money from commercial banks or from foreign governments and multilateral lenders such as the IMF and the Word Bank. Such actions often lead to heavy debt overload and caused a great economic disproportion. It is known from the history of developing countries that they also showed their inability to manage properly and operate effectively the borrowed money to support their economic growth. So due to such unsatisfactory results of government borrowing, developing countries began to count on investment in equities as a means of financing economic growth. They are looking for to attract investment in equities from private investors who will be their partners in further development. If a developing country is willing to attract investment in equities, it has to set the prerequisites of a market economy and arrange a business climate that corresponds to the expectations of foreign investors. In such a case this change in financing sources will be an important factor for the rise of emerging markets.
The emerging markets can change the traditional view of development following some certain steps. First of all, foreign "investment" has to displace foreign "assistance." Investment in the emerging markets is not connected any more with the traditional opinion of providing development assistance to poorer countries. Besides, emerging markets are to improve their trade relations and working capital investment with developed countries. Trade and capital flows are appointed to the new market opportunities to a greater extend, and not to political consideration. The growing two-way trade and capital flows between emerging markets and developed countries show the transition from dependency to global interdependency. Moreover, due to the faster information exchange, especially with the help of the Internet, the emerging markets have a possibility to integrate quicker into the global market.
There is no doubt that emerging markets need many efforts in order to create their market economy and to guarantee a considerable development, emerging markets still have many challenges arising from the basic problems connected with their traditional economic and political systems. The economy of the market needs those states to determine new role of the government in the process of development and to lessen the government's inopportune intervention. One more important problem that those countries have to solve is to control corruption, which disfigures the business environment and hinders the development process. Such countries have to arrange structural reforms in their financial system, legal system, and political system, so as to assure a disciplined and stable economy that is comparatively free of political disturbances and interference (Broner & Lorenzoni & Schmukler, 2007).
As for the prospects of the emerging markets for the next years we may say that they are the "key swing factor" in the growth of world trade and global financial stability, and they will become soon critical and important players in global politics (Mishkin, 2006). They have a big unused potential and they are directed to arrange domestic reforms to support sustainable economic growth. If they can carry on political stability and provide their structural reforms, their future is promising.
So, eemerging markets are the countries that are restructuring their economies in accordance with market-oriented lines and provide a number of different opportunities in trade, technology transfers, and foreign direct investment. The countries with emerging markets made an indispensable transition from a developing country to an emerging market. Each of them is essential because a separate market and the combined effect of the group as a whole will change in future the face of global economics and politics.
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