A report from the Financial Times has sparked debate on the applicability of the term “emerging markets”, with some countries possessing questionably more advanced characteristics than those actually branded ‘developed’. Take China, for instance who’s export diversification trumps the vast majority of, if not all other countries in the world. The key question here, is what defines a market as developed?

According to the IMF, there are three main criteria which helps determine the status of an economy as either advanced or emerging/developing (EMDE):

  • Per Capita Income level
  • Export Diversification
  • Degree of integration into the global financial system.

 

Although these are the main factors, it must be noted that an expanse of other variables are also considered when categorising a market as, fundamentally, they comprise of many dimensions, including socioeconomic factors too. Thus, political, economic and legal risk are all notable criteria, but also opacity of say, creditworthiness or market accessibility are other factors which could be considered. See Karolyi’s analysis of the term.  

InvestAsian has compiled data on a select few countries to determine the applicability of such terms.

 

Economic Indicators Correlate

Figure 1 below shows the significant gap in GDP per capita Income between the two types of economies. The subsequent evidence suggests that a relatively higher income is commonplace in a developed economy which usually means a more stable business environment. The important consideration here, is that the above variable usually correlates with others too, such as unemployment rate or gender equality.  

Another factor is export diversification. It is considered that the more diverse the export profile a country has, the more developed the economy is. It is clear, again, that the developed markets possess a somewhat more diverse assemblage of exports. And this is usually the result of sophisticated governmental controls of economic legislation. Subsequently, the diverse export profile is therefore coherent to the per capita income level.  

 

Relativity is Key

However, with respect to the above information, and putting GDP per capita aside, China’s GDP growth far exceeds that of Thailand, which reverberates the questionable classification of an emerging market. It is therefore postulated, is China a new strand of ‘emerging’?

The simple answer is no. China’s GDP is certainly admirable, especially when we consider the rate that is has continually grown at over the past few decades. However, as it has been said, the distinction between emerging and developed economies is determined by much more than just a said few statistics. In comparison to Thailand, such economic indicators are proportionally fair. Take GDP per capita or export diversification. For China, and many other emerging economies, legislation and governmental influence are normally their downfall, which hinders them from being classified as developed. Even though China supersedes any other emerging economy in certain statistics, relativity should always be considered.

 

What Does this Mean for Asian Countries?

Emerging economies tend to bear a higher growth rate, especially when conditions are favourable, take Cambodia. This means, for investors, that the potential of return of investment is usually far greater than what it may be in a developed economy. Though the risks associated with this are also far greater. ASEAN member nations have also seen continued growth, especially in recent years, which promotes the idea that emerging economies have the potential to attract greater inward investment.

So, are emerging markets still emerging? Yes, they are. A prescribed level of economic and humanitarian sophistication fundamentally distinguishes an economy as developed, and until emerging markets reach this level, they will still be considered emerging. One must consider the relativity of markets, as although fruitful continued economic growth may be appealing, it does not necessarily mean they are developed.

 

Emerging Markets GDP Chart

 

About Henry Skinner

Henry Skinner is an investor based in the United Kingdom. He is currently researching Asian markets and working on several international business developments.
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