This is the first in a series of posts about the characteristics of stock markets in developing countries. The term “emerging markets” is used very often in casual talk on this topic, but can mean any of several things, referring either to the characteristics of the economies, or of the securities markets in these countries, or of the companies whose stocks are traded in these markets. These are all different things.
Where the terms come from
During the Cold War conflict between the US and the Soviet Union, commentators began to speak of the First World (the US and its allies), the Second World (the USSR and its allies) and the Third World (unallied nations, many of which were developing countries).
At around the same time, the UN began using a four-part terminology that divided the world’s countries according to wealth/income levels. For the UN, the First World ends up being the US and its Cold War allies, the Second World is the USSR and its allies, the Third World was everyone else who did not belong to the Fourth World, that is, countries with annual per capita incomes of US$100 or less. Still, the UN division corresponds very closely to the political division that was the more popular way of speaking during that time.
After the fall of the Berlin Wall, the terms shifted to ones with a more economic, less political, basis: developed and developing. The term emerging also came into vogue, meaning countries with rapidly growing economies that are quickly bridging the gap between the developing and developed world.
The term developing quickly became a controversial one, for two reasons. Many of the countries so designated found the term to be condescending. Multi-national economic and political agencies pointed out that since this was a catch-all term, it also was also used to describe countries that were stagnating or declining economically and which therefore were in no sense developing. As a result, these organizations have begun to refer to this set of countries as either less developed countries (LDCs) or least economically developed countries (LEDCs). They generally correspond to the Fourth World countries mentioned above, but the income threshhold has been raised to around $1000.
Investors have generally taken the political or economic terminology to use for talking about various stock markets outside the developed world. Today the two terms most popular are emerging, which refer to the largest and longest-standing stock markets and frontier, which refers to the markets in LEDCs.
These distinctions aren’t completely adequate, however. Emerging or frontier countries can have markets that vary considerably in liquidity conditions, rules of operation and attitude toward foreigners.
This will be one of the topics in later posts in this series.