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How to Know if an Economy is an Emerging Market Economy

In 1981, Antoine W. Van Agtmael of the International Finance Corporation of the World Bank coined the term Emerging Market Economy (EME) It is the term given to economies that feature a low to middle per capita income.

Today, an approximate of 80% of the world’s countries fall under the category of emerging market economy ranging from very big countries to small islands as in the case of China and Tunisia. How is this possible, you may say, when China is obviously an economic powerhouse? Let’s take a look at some categories for an economy to be called an emerging market economy.

1. Transitional

One characteristic of an EME is that it is in transition from a closed economy to an open market economy. The economy is in reform while accountability is developed within the system to promote a stronger growth, establish responsible economic performance levels, efficiency in the capital market, and as well as transparency for the whole nation. This transition can be seen in the transformation of the Soviet Union and Eastern bloc countries who is now steadying their footing in the economic field.

3. Increased Local and Foreign Investment

A great indicator of an EME is a hike in investments locally and abroad. Seasoned investors flock to EMEs due to their growth potential that’s why these local and foreign investments mean that there is confidence that the economy will continue growing. The entry of these foreign currencies create a ripple of positive events as more foreign investors are attrated to the EME and the increase in foreign currency stimulates the local stock market.

4. Economic Requirements

An emerging market economy is an economy that is transitioning into an advanced economy that requires the following: a market exchange, a regulatory body, and liquidity in local debt and equity markets. Furthermore, financial structure such as banks, stock exchange, and a unified currency must have been established already.

Investing in EME poses as a risky endeavor due to the fact that their economies are much more unstable compared to advanced nations. Factors such as political instability, domestic infrastructure issues, volatile currency, and limited equity opportunities significantly increase investment risk. However, they do offer bigger potential for growth and diversification and thus profit. Companies in such countries have greater capacity for growth at a much faster speed. Furthermore, consumers in EMEs have purchasing power enough to surpass those in advanced economies. In any case, investors that want to dabble in the EMEs must be ready and capable to ride the currents of these temperamental countries.

Created by : Joan
Published : 17 Dec 2015

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