Emerging markets is one of the most powerful terms in the world. Companies plan global expansion strategies with reference to it, multilateral organisations use it to analyse key economic and social trends and some $10.3tn is invested in EM stock and bond markets by international funds via an alphabet soup of EM indices.

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More than this though, our mental maps of the world tend to create an invisible but pervasive partition between EM countries at the periphery and developed market countries at the core of world affairs.

But such maps — say critics — are not only crude, they are outdated and unhelpful.

The Financial Times has run a series of articles — collectively titled Redefining Emerging Markets — on the limitations of the EM definition, while an editorial called for it to be scrapped. The main problems with the definition are twofold.

First, EM countries now account for a greater weight in world gross domestic product than DM countries (when measured by purchasing power parity) and several EM countries also have higher per capita GDPs than their DM counterparts.

Second, the lumping together in a single category of EM countries as diverse as China and the Czech Republic implies an equivalence and homogeneity which does not exist.

Redefining Emerging Markets: Suggested Alternatives

To help illuminate the debate the FT has published several alternatives to the emerging markets definition written by experts around the world. They are as follows:

Governance regimes are the key

John Paul Smith

Elderly residents sit and play cards at outdoor tables in a park in Lisbon, Portugal, on Thursday, Jan. 9, 2014. Portugal is relying on pensioners to help stem a rise in borrowing costs less than a year before the country's rescue program ends. Photographer: Mario Proenca/Bloomberg
A card game in a Lisbon park © Bloomberg

John Paul Smith, founder of Ecstrat, a consultancy advising on asset allocation, proposes a six category matrix that is aimed at assisting investors gauge risk. Each category defines a different type of governance regime, ranging from “Liberal Governance Regimes” to “Authoritarian Governance Regimes”. Countries fall into each category based on a quantitative and qualitative assessment of which regime they fit. Each regime has different risk associations for investors.

From Brics to Blocs

Michael Power

An Indonesian clerk handles stacks of Indonesian rupiah notes at a money changer in Jakarta on August 28, 2013. Indonesia on August 23 announced measures to shore up its economy as Asia's emerging nations come under huge pressure from outflows of foreign cash that have sent their stock markets and currencies plummeting. AFP PHOTO / ADEK BERRY
© AFP

Michael Power, strategist at Investec Asset Management, suggests a move away from static emerging market groupings such as Brics (Brazil, Russia, India, China) toward a dynamic system of “Blocs”. His matrix divides countries into the four corners of a quadrant depending on whether they run a current account surplus or deficit and whether they primarily export manufactured goods or commodities. Sharp divergences in economic performance are evident between countries in different corners of the quadrant. By far the strongest are manufacturing exporters that run current account surpluses.

Cities, not countries, are key to fortunes

Richard Dobbs

Towers stand among other residential and commercial buildings in the Mahalaxmi area of Mumbai, India, on Monday, May 11, 2015. Mumbai's long-cherished dream of becoming another Shanghai risks remaining just that as regulatory flip-flops frustrate plans for modern skyscrapers in place of the city's old structures. Photographer: Dhiraj Singh/Bloomberg
© Bloomberg

Richard Dobbs, director at McKinsey Global Institute, suggests that country-level groupings are less than helpful because they miss the real locus of developmental dynamism. He says that 440 emerging market cities — very few of them “megacities” — will account for close to half of expected global GDP growth between now and 2025. Many of these cities, such as Foshan, Porto Alegre and Surat, are not yet household names. Many company executives have not yet started to allocate resources with reference to this list of dynamic cities.

Group countries by 10 ‘clusters’

Peter Marber

Residential units are seen clustered tightly together in an apartment complex in the Quarry Bay area of Hong Kong on July 7, 2014. Housing prices in the southern Chinese city have roughly doubled since 2009, with prices being pushed up by buyers from mainland China, in a trend towards even higher population density that now sees, according to government estimates, around 170,000 people living in tiny subdivided apartments in and around already cramped residential units.  AFP PHOTO / ALEX OGLE        (Photo credit should read Alex Ogle/AFP/Getty Images)
© AFP

Peter Marber, head of emerging market investments for Loomis, Sayles & Company, an asset manager, suggests that countries should be grouped into 10 numbered “clusters” to produce a ranking of socio-economic maturation. The “cluster” methodology ensures that similar countries are grouped together, according to nine criteria that range from per capita income to economic competitiveness, credit ratings, health, education, political climate and others. Group 10 has the highest scores — denoting the most mature countries from a socio-economic standpoint — and group 1 the lowest scores. Interestingly, some countries commonly classified at “emerging markets” — such as Chile, Taiwan and South Korea — rank above some countries commonly classified as “developed” including Spain, Portugal, Ireland and Italy.

Asteriscs is a new definition

Alexander Kozhemiakin

A stock investor checks his phone under Chinese writing in the background which translates as 'stock market has risk' at a brokerage house in Shanghai
© AFP

Alexander Kozhemiakin, head of emerging markets at Standish, an asset management company, suggests Asteriscs as a new definition to replace “emerging markets” for investors. He says that in a world enamoured of acronyms, his stands for “assets tied to economies of risky countries”. He suggests that key benchmarks for assessing risk in a country include a geopolitical threat, wealth below the high income threshold, impaired creditworthiness and a non-democratic regime.

Ranking countries according to 70 variables

Andrew Karolyi

© AFP

Andrew Karolyi, professor of emerging market finance at Cornell University’s Johnson School, uses 70 variables sprinkled among six separate criteria to produce a ranking of countries’ risk profiles. His six criteria include financial market capacity constraints, operational inefficiencies in trading systems, foreign accessibility restrictions, corporate opacity, limits to legal protections and political instability. Mr Karolyi concludes that Venezuela is the most vulnerable among all emerging markets and Taiwan is the strongest.

Follow James Kynge on Twitter: @JKynge

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