Five Key Facts about Emerging Markets

The United States experienced a higher-than-projected year of growth in 2017, and it wasn’t alone. Emerging and developing economies grew an estimated 4.7 percent last year compared to 2.3 percent in advanced economies. Even though some developed economies are turning inward when it comes to global trade, a rebound in commodity prices and the introduction of stronger monetary policies inspires hope that more growth is yet to come.

Emerging markets include those nations whose economies are progressing towards becoming more advanced or developed, usually through industrialization and rapid growth. More and more, emerging markets are defining global trade while providing opportunity for investment. Here are five key facts to know about emerging markets.

Frontier markets offer a new class of growth.
When most people think of emerging markets, they think of big hitters like China, India, and Brazil. But a subset of countries called “frontier markets” could outpace their growth in the coming years. Africa is home to many of these markets, such as Nigeria and Kenya, while Vietnam and Argentina have been receiving a lot of attention as well.

There’s a lot of complexity within every emerging market.
A one-size-fits-all approach can mean failure for investors in emerging markets with both a lot of opportunity and a lot of risk. Take India, for example—a country made up of 29 different states, 22 official languages, more than 720 dialects, and different regulations. Luis Miranda, ’89, has been part of three successful startups in India—HDFC Bank, ChrysCapital, and IDFC Private Equity. “Investing in India continues to be an enigma,” said Miranda. But the key to investing in complex markets is having the fundamentals and leadership needed to follow through. “Ideas are easy to come by,” said Miranda. “The challenge is in executing those ideas. Successful companies are those that have focused on execution.”

Question the corruption narrative.
There’s a stereotype that emerging markets are associated with corruption and unsound governance, but that’s not always true, and many countries are also improving. In Vietnam, campaigns against government corruption and its policies for state-owned enterprises have led to an increase in direct foreign investment, and a 46.9 percent surge in the country’s stock market value in 2017. The country moved up 14 spots in the World Bank’s Ease of Doing Business Index.

Manufacturing-based economies are in for change.
Manufacturing and exporting have been a driver of growth in the largest emerging markets for years. But with the rise of automation, developed economies may move away from outsourcing their manufacturing to low-cost labor regions, forcing emerging economies to move past an export-driven model to more service-based growth. “The decline in the share of compensation paid to labor carries particularly fascinating implications for inequality, growth, and structural transformation in China, India, Mexico, and other similar countries who haven’t yet fully developed,” said Brent Neiman, professor of economics at Chicago Booth.

Leapfrogging will continue to transform.
Countries “leapfrog” when they skip steps in industrialization by adopting more advanced technologies inherited from other economies. For example, sub-Saharan Africa skipped the technological advance of landlines directly to mobile phones. As blockchain emerges as a potentially transformative technology, some are wondering whether governments and businesses in emerging economies that are still using outdated infrastructure could skip over legacy systems straight to blockchain.

Learn more about emerging markets with Luis Miranda, ’89, Booth professors and alumni, and other business leaders at the 2018 Emerging Markets Summit, “Navigating Emerging Markets in a World of Transition,” on April 14 at the University of Chicago Booth School of Business.