# Emerging Market Economies: Definition, Growth, and Key Players

> **Definition**
>
> The economy of a country that is undergoing a transition toward greater economic growth, global business engagement, and industrialization

## What Is an Emerging Market Economy?

An emerging market economy is the economy of a developing nation integrating into the global market, marked by rapid growth in GDP, trade volume, and increased foreign direct investment. These economies, such as India, China, and Brazil, are characterized by a shift from agriculture to industrialization, adopting reforms and standards from developed markets to support their transition. However, they come with risks like political instability and currency volatility, offering investors both opportunities and challenges.

### Key Takeaways

*   Emerging market economies are developing nations transitioning towards becoming developed economies with higher standards of living.
*   These markets often present opportunities for higher investment returns due to rapid growth, but they also carry greater risks such as political instability and currency volatility.
*   Emerging market economies are characterized by increasing integration with the global economy and the development of modern financial and regulatory systems.
*   Investment in emerging markets requires caution as these markets may not have the same level of market efficiency or liquidity as developed markets.
*   The classification of countries as emerging markets can vary, with the IMF identifying 20 and MSCI naming 24 countries in this category.  
    

![Emerging Market Economy: A country that's transitioning from a low income, often pre-industrial economy toward a modern, industrial economy with a higher standard of living.](https://www.investopedia.com/thmb/3cuQDORzGthbLiv0GBFcjOEejbE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/emergingmarketeconomy.asp-FINAL-9eeea54899d645a49ac9a913ee986371.png)

*— Investopedia / Jiaqi Zhou*

## Characteristics and Dynamics of Emerging Market Economies

Investors seek emerging markets for the prospect of high returns because these markets often experience faster economic growth as measured by [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp). Higher returns usually come with much greater risk, however.

### Navigating the Risks in Emerging Markets

Risks can include political instability, domestic infrastructure problems, currency [volatility](https://www.investopedia.com/terms/v/volatility.asp), and illiquid equity because many large companies may still be state-run or private. Local stock exchanges might not offer [liquid markets](https://www.investopedia.com/terms/l/liquidmarket.asp) to outside investors.

Emerging markets often lack the advanced market and regulatory institutions found in developed countries. Their market efficiency and regulatory standards often fall short of those in the U.S., Europe, and Japan.

###  Indicators of Growth and Progress in Emerging Markets

Emerging markets typically have a physical financial [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp), including banks, a stock exchange, and a unified currency. A key aspect of emerging market economies is that they adopt reforms and institutions like those of modern developed countries over time. This promotes economic growth.

These economies shift from agriculture and resource extraction to industrial and manufacturing activities. Their governments often adopt strategies to promote economic growth and industrialization. Strategies may include export-led growth and import-substituting industrialization.

Export-led growth is common in emerging economies as it boosts global trade engagement. They invest in education, infrastructure, and legal reforms to protect investor rights.  

> **Important**
>
> Frontier markets are usually smaller than emerging markets with lower per capita income, less market liquidity, and less industrialization. They offer attractive investment opportunities but frontier markets are considered riskier for investors than emerging markets.

## Criteria for Classifying Emerging Markets

Emerging market economies are classified in various ways. Levels of income, quality of [financial systems](https://www.investopedia.com/terms/f/financial-system.asp), and growth rates are all popular criteria but the exact list of emerging market economies can vary depending on who you ask.

The [International Monetary Fund (IMF)](https://www.investopedia.com/terms/i/imf.asp) classifies 20 countries as emerging markets. [Morgan Stanley Capital International (MSCI)](https://www.investopedia.com/terms/m/msci-acwi-exus.asp) classifies 24 countries as emerging markets. Standard and Poor's (S&P), FTSE Russell, and Dow Jones also vary slightly in their classification of countries as emerging markets.

A country can be upgraded to developed status or downgraded to a frontier market. Developed nations may likewise be downgraded to an emerging market as was the case with Greece. Frontier markets such as Qatar and Argentina may be upgraded to emerging markets.

## What's an Emerging Market Economy?

An emerging market economy is generally considered an economy that's transitioning into a developed market economy. It has [rapid GDP growth](https://www.investopedia.com/articles/investing/091815/emerging-markets-analyzing-philippines-gdp.asp), growing per capita income, increasing debt and equity markets liquidity, and an established financial system infrastructure.

## What Countries Are Classified As Emerging Markets?

Classifications differ but the so-called BRICS countries represent five emerging markets with major economic growth and opportunities for investment: Brazil, Russia, India, China, and South Africa. The GDPs of these countries have increased steadily from 2000 through 2023. Data for 2024 isn't yet available.

That trend is expected to continue through the years ahead.

## Do Emerging Markets Make Good Investments?

They can make good investments due to their propensity for rapid GDP growth compared to more mature markets but investing in emerging markets can be risky due to potential political instability, lack of dependable information, currency fluctuations, lower liquidity, and investment volatility.

Investors should carefully weigh potential risks and rewards before making any investment.

## The Bottom Line

Emerging market economies represent nations transitioning towards developed status, characterized by increasing integration with global markets and industrialization. These economies often present lucrative opportunities for investors due to rapid GDP growth and reforms mirroring developed markets. However, investing in these markets carries inherent risks such as political instability and currency volatility. While they offer substantial returns, potential investors should carefully consider these risks, supported by a strong understanding and analysis of each market's unique conditions.

> **Article Sources**
>
> 1.  International Monetary Fund. "[Miles to Go](https://www.imf.org/external/pubs/ft/fandd/2021/06/the-future-of-emerging-markets-duttagupta-and-pazarbasioglu.htm)."
>     
> 2.  Morgan Stanley Capital International. "[MSCI Emerging Markets Index (USD)](https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111)." Page 1.
>     
> 3.  The World Bank. "[GDP (current US$) - South Africa, Brazil, India, China, Russian Federation](https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=ZA-BR-IN-CN-RU)."