Characteristics of Emerging Economies

Abstract

Today, roughly 30 countries are classified as by the World Bank. Investor interest in these markets has grown substantially over time. During the first half of the 1990s, privatization and economic liberalization that took place across emerging market countries substantially enlarged the set of emerging market securities available to foreign investors and thereby provided a strong and decisive impulse for portfolio investments in emerging markets. The purpose of this technical note is to describe some key characteristics of emerging capital markets and compare them with those of developed and less-developed or frontier markets. This technical note is the first of three notes on emerging markets. See also UVA-F-1454 and UVA-F-1455. Excerpt UVA-F-1453 Investing in Emerging Markets Technical Note Series No. 1 CHARACTERISTICS OF EMERGING MARKETS Today, roughly 30 countries are considered to be in transition to higher levels of economic development and have hence earned the title “emerging markets” from the International Finance Corporation (IFC) of The World Bank. Initially (in 1981) the IFC emerging market index included stocks of publicly traded companies from nine countries. By 2002, the total number of countries covered in the IFC emerging market indices had reached 33. Standard & Poor's acquired the IFC indices in January 2000, and they are now known as the S&P/IFC indices. Investor interest in emerging markets has grown over time. Before 1980, little capital flowed into these markets due to the lack of financial products and services available to foreign investors and the perceived high market risk and volatility. Beginning in 1981, private portfolio investment in the emerging markets began to grow. During the first half of the 1990s, the privatization and economic liberalization that took place across emerging market countries substantially enlarged the set of emerging market securities available to foreign investors, who thereby developed a strong and decisive interest in them for portfolio investments. Net portfolio inflows to emerging markets peaked in 1994 at $ 113 billion, only to decrease sharply in the following years, mainly due to the widespread financial turmoil that affected these markets (the “Tequila Effects,” kicked off by the devaluation of the Mexican peso). The purpose of this technical note is to describe some key characteristics of emerging capital markets and compare them with those of developed and less-developed, or frontier, markets. Although other emerging market indices are available (e.g., Morgan Stanley's Capital International [MSCI] index), the S&P/IFC cohort is used in this technical note, because it includes a broader set of countries than competing indices. S&P/IFC considers a market to be “emerging” if it meets at least one of the following criteria: 1. It is in a low- or middle-income country, as defined by the World Bank, and . . .