What Is an Emerging Market Economy?

An emerging market economy is a type of national economy that is in the process of moving toward a higher level of efficiency and demonstrating more comprehensive standards, in terms of securities and trade regulation, that are more in line with advanced economies. With this type of economy, there is usually a small but functional banking system in place, as well as the presence of a viable stock exchange and a currency that is considered relatively stable in the world market. An economy of this type is often seen as a worthwhile investment, in that a great deal of return can be made by investing in businesses and other opportunities as this process of advancement continues.

There are several characteristics that tend to lead to a designation of the economic system of a nation as being an emerging market economy. The accounting processes used to internally assess the nation’s financial wealth and production are similar to those utilized by nations with more advanced economies. The financial infrastructure of the nation is relatively solid and showing signs of expansion. In terms of domestic businesses, the country has established industries that provide a foundation for the financial well being of the nation, and are also in the process of cultivating additional industries.

An emerging market economy may operate with any number of economic systems. Some may utilized a free price system, offering a great deal of competition in the marketplace for all who want to be involved. Others may involve a number of state owned and controlled industries, creating a situation in which one or more government agencies monitor and manage the rate of growth. Still others may go for a mixed economy in which there is a fair amount of competition while still involving a good deal of control by the government, either in terms of some direct control of businesses or in the creation of trade laws and regulations.

For investors, the beauty of an emerging market economy is the potential returns that can be generated as that economy continues to expand. While the returns can be significant, there are also risk factors that should be taken into consideration, such as the potential for political shifts that adversely affect trade or the performance of the nation’s currency on the world market, the propensity for natural disasters that could decimate the internal economic structure of the nation, and even shifts in the amount of control that the government has over trade and commerce issues. When investments in an emerging market economy are managed prudently and based on accurate perceptions of how that economy will move in the future, an investor can stand to generate returns that help to offset any risk that may be present.