Portfolio Design: A Modern Approach to Asset Allocation

WHAT IS AN EMERGING MARKET?

How is an emerging market defined? The International Finance Corporation traditionally used one criterion, gross national income per capita.2 Any country that was classified by the World Bank as a low income or middle income country was also classified as an emerging market. In 2008, China had a total gross national income of $3,899 billion, but a per capita income of only $2,940. Singapore, in contrast, had a gross national income of $168 billion, but a per capita income of $34,760.3 So China is classified as an emerging market even though its total output was many times that of Singapore because its income per capita is so low.

The bulk of the world’s income is earned by the high income countries. Figure 6.1 shows the division of the world’s gross national income (GNI) in 2008. Only 27.2 percent of GNI is earned by the emerging market countries even though they represent 84 percent of the world’s population. The developed countries dominate world output and world income. Western European countries (including the Euro area and other European industrial countries like the United Kingdom) produce almost 30 percent of world income and the United States another 25 percent, while the other developed countries of the world including Japan make up the rest.

FIGURE 6.1 World Gross National Income in U.S. Dollars, 2008

Source: World Bank, World Development Indicators Database.

Figure 6.2 breaks out the GNI of the six largest emerging market countries. China ...