Emerging markets have changed considerably over the last decade: financial inclusion has widened and technology penetration has increased, most notably as governments have introduced regulatory reforms to promote growth and mitigate risk.....
Emerging markets lag behind more developed economies in terms of their financial sectors, in particular. Many emerging economies have also historically had low levels of financial inclusion. In recent years many governments in emerging markets have liberalized a range of sectors and introduced a host of reforms, including regulations surrounding financial services. For example, Argentina regained emerging market status in 2018 after its government removed foreign exchange restrictions and capital controls, eliminated cash reserves and monthly repatriation limits in the equity market, and abolished lock-up periods for investments.
Globally, foreign ownership restrictions have been relaxed across a host of sectors, including real estate, banking and education, and many governments have targeted improvements in the ease of doing business. This allows for greater foreign participation and often presents an opportunity for partnerships with domestic companies.
Technological development is also enabling a transformation of emerging economies. In addition to facilitating entrepreneurship and innovation, increasing mobile penetration and app-based payment services have widened financial inclusion, which benefits more sectors than just financial services. For example, there is considerable potential for the growth of e-commerce in emerging economies, particularly as these economies begin to move away from cash and reduce their reliance on cash-on-delivery payment methods.
Top emerging markets
The factors influencing growth in emerging markets have changed in the 21st century. Crucially, trade has been a key driver of emerging market growth in recent years, aided by falling manufacturing costs. This is set to continue, against a backdrop of reduced transport and logistics costs.
Trade blocs act as a catalyst for the movement of goods by increasing the ease of cross-border commerce and reducing associated tariffs – agreements that create these blocs are therefore an attractive path to unlock economic growth.
Economic diversification has also been an important driver of emerging market growth in recent years. Diversification generally refers to generating economic output from a wider range of sectors, such as tourism, in order to reduce reliance on traditional – and often lower-value-added – pillars of the economy like agriculture and natural resources.
More recently, amid global trade disputes and Covid-19-related disruption to logistics, diversification has proven important not only in terms of sectors, but also trade routes and supply chains. Diversification will therefore be crucial for many emerging economies in 2020 to address trade imbalances and reduce their susceptibility to economic headwinds – both externally and internally.
At the same time, rapid technological innovation is disrupting traditional business models, allowing emerging markets to leapfrog established development stages, and placing increased focus on upskilling the labor force in emerging economies. As part of the so-called Fourth Industrial Revolution, which is based on the application of new digital and automated technologies in production processes and service delivery, the development of human capital has been prioritized.
Many emerging markets are characterized by a large and growing young population, which makes it even more crucial that they advance their education systems – which, in many cases, may lag behind global standards – in order to develop an adequately skilled workforce and prevent growth in unemployment. This can help emerging markets maintain economic expansion by sustaining productivity, if supported by a pro-growth agenda and innovation to encourage investment inflows and spending.
Among the factors that pose the most notable risk to emerging markets are fluctuating commodity prices, currency instability and current account deficits. Ongoing additional challenges may include low ease of doing business, insufficient domestic regulation – which may lead to questions surrounding quality and reliability – or the potential for socio-political instability.
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