Antoine van Agtmael was an economist at the World Bank’s International Finance Corporation in the early 1980s. His mission was to raise a number of promising stock markets out of obscurity and so attract the investment they would need to prosper.
Armed with data on 10 such economies, Agtmael initially pitched the idea of a “Third-World Equity Fund”. The concept was met with enthusiasm, but early feedback suggested it might benefit from a better name.
Eventually, Agtmael came up with a term designed to fully capture a spirit of progress, uplift and dynamism. You may be familiar with it: emerging market.
This neologism has, of course, long since entered the everyday lexicon of finance and investment. Yet even today it can be a source of controversy and confusion for investors.
The controversy most often revolves around the question of what an EM actually is – or, even, is not. For example, why is China, the world’s second-largest economy, still not recognised as a developed nation?
Meanwhile, the confusion most often revolves around the level of risk EMs can entail. Is it inevitable that investments in these countries are more perilous than those in their developed counterparts?
There are no incontrovertible answers to these enduring puzzles. Yet investors at least need to understand why the EM space can represent such a broad church, and, crucially, why it can offer an equally wide array of opportunities.
What is an EM?
Despite Agtmael’s trailblazing work, the World Bank no longer maintains its own official list of EMs. It sold its database to Standard & Poor’s, one of several index providers that have assumed responsibility for bestowing or withdrawing EM status.
With the International Monetary Fund and a handful of academic institutions also weighing in, there are now numerous means of classifying an EM. They take into account factors such as incomes, life expectancy, growth rates, accessibility, regulation and the quality of financial systems.
As if to muddy the waters even more, the World Trade Organization allows its members to self-identify as developed or developing. The latter can benefit from 'provisions', including preferential tariff treatments that help make exports more competitive.
All this tells us the process of analysis and categorisation can be both objective and subjective. As a result, across-the-board agreement on how many EMs there are at any one time is rare, if not unheard of.
On the whole, though, an EM can be thought of as a nation undergoing a positive economic transition. Specifically, the journey is from a low-income, sometimes pre-industrial economy to a modern, industrial economy.
In tandem, an EM can be viewed as an economy that is not only growing but becoming more integrated with global markets. This translates into increased trade volume and greater foreign direct investment.
Such a transformation should bring a higher standard of living. It is perhaps this consideration, above all, that ought to be kept in mind amid debates around whether some nations merely masquerade as EMs.
