Chapter One

What Are Emerging Markets?

An Investment Opportunity Not to Be Missed

While I was studying economic development at MIT in the early 1960s, the term underdeveloped countries was still in use, while more palatable euphemisms like developing countries were just coming into being.

The term emerging markets entered the vocabulary of the investment world in the late 1980s. The International Finance Corporation defined an emerging market this way: “A market growing in size and sophistication in contrast to a market that is relatively small, inactive, and gives little appearance of change.” At the time, the term was a declaration of hope and faith on the part of those of us who were studying emerging stock markets, because many of these markets—such as those of Argentina, Peru, and Venezuela—were submerging faster than they were emerging.

The Name of the Game

The purview of international portfolio investors was quite limited in the early days. In fact, if the concept of emerging markets had been current at that time, Japan would probably have been placed in that category. In the 1960s, investing in Japan was considered to be a risky and pioneering adventure; it was known as a land of cheap and shoddy exports, weak currency, and an unstable political future.

When Sir John Templeton asked me to manage the first emerging markets fund in 1987, a universally accepted operational definition of an emerging market did not exist. Intuitively it was known that emerging implied developing ...

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