When Emerging Markets Are No Longer Emerging

Updated from 2:15 p.m. EDT

The term "emerging markets" is now more than 25 years old and has come to define wide swaths of the world undergoing rapid economic change. Dozens of countries fall under the label even though they are evolving at their own pace and with their own twists on economic development.

Now, as many emerging markets show signs of a strong and growing middle-class population, observers wonder whether the term has lost some of its meaning. Initially, the phrase applied to fast-growing economies in Asia and was used in Eastern Europe after the fall of the Berlin Wall. As global interest in market-driven economies grew, investors began to look toward Latin America for emerging markets and eventually at countries such as Indonesia, Thailand, China, India and Russia.

"Once you start to put so many countries in the same category, the category loses meaning," says Wharton management professor Mauro Guillen. "While South Korea, Singapore and Taiwan share characteristics, once you put them in a bucket with India, Mexico, Argentina, Indonesia and Poland, it's no longer meaningful. The term 'emerging markets' has become a victim of its own success."

Wharton management professor Gerald McDermott agrees the definition is muddy, but the intent behind the phrase remains the same. "People started using it more loosely, and as more countries fell under the rubric, it lost a little bit of its original meaning," he says. "I think it continues to convey a reality that we're not talking about the developing world at one end or the developed world at the other. We're talking about countries with great promise and great potential. They're growing, but they're still not there."

Looking Down on the 'Third World'

Antoine W. van Agtmael was deputy director of the capital markets department of the World Bank's International Finance Corp. (IFC) when he coined the phrase "emerging markets" during an investor conference in Thailand in 1981.

Van Agtmael recalls that back then, Thailand was grouped with other poor countries that were known as the "Third World." He felt that name was discouraging investors from putting funds to work in Thailand and other poor countries with development potential.

"People looked down upon the 'Third World.' It sounded so distasteful. I thought people with that feeling would never invest," he says. "I had lived in Thailand and I knew it was better than people thought. I felt we had to use a more uplifting term." Initially, the definition applied to stock markets in countries with a cutoff of $10,000 in income per capita. Those specific numerical references soon faded. The term "emerging markets" came to be synonymous with "emerging economies" and no longer relied on income or other statistical measures.

According to Wharton faculty, the most important element in defining an emerging economy poised for growth is the strength of its economic and political institutions, such as the rule of law, regulatory controls and enforcement of contracts.

Philip Nichols, Wharton professor of legal studies and business ethics, says a numbers-based definition is less meaningful than an understanding of the way in which business is done in a country. Emerging economies, he adds, are in places that are changing from a system based on informal relationships to a more formal system with rules that are transparent and apply equally to all participants in the market. "We used to use numbers like income or market liquidity [to define these markets], but that was worthless. Those kinds of definitions don't tell you what is really going on."

The Cold War triggered a global re-examination of financial systems, not only in the former Soviet Union but around the world, Nichols says. Planned economies in Latin America failed and a new generation of Chinese leaders introduced economic reforms. "It's amazing that so many different places were coalescing on this one change at the same time."

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