Emerging Markets

What brings them into being?

There are two potential causes for the creation of emerging markets: the failure of state-led economic development and the need for capital investment.

· First, state-led economic development failed to produce sustainable growth in the traditional developing countries. This failure and its tremendous negative impact pushed those countries to adopt open door policies, and to change from the state’s being in charge of the economy to facilitating economic growth along market-oriented lines.

· Second, the developing counties desperately needed capital to finance their development, but the traditional government borrowing failed to fuel the development process. In the past, the governments of the developing countries borrowed either from commercial banks or from foreign governments and multilateral lenders like the IMF and the Word Bank.

This often resulted in heavy debt overload and led to a severe economic imbalance. The past track record of many developing countries also demonstrates their inability to well manage and efficiently operate the borrowed funds to support economic growth.

In light of the unsatisfactory results of government borrowing, developing countries began to rely on equity investment as a means of financing economic growth. They seek to attract equity investment from private investors who will become their partners in development.

To attract equity financing, a developing country has to establish the preconditions of a market economy and create a business climate that meets the expectations of foreign investors.

This change in financing sources thus became another factor leading to the rise of emerging markets.