It's time investors rethink the developed-emerging market divide

What differentiates an emerging market from a developed one? The question seems simple – it is not. And as time goes on, answering it is actually becoming more difficult as the line fades between these two categories. For investors, that has serious implications.

Globally, investors have long relied on a handful of index providers, primarily MSCI for equities and JP Morgan for fixed income and currencies, to answer this question. Today, trillions of dollars track these emerging market indices.

These providers use proprietary frameworks to categorize countries, but investors are starting to question whether these classifications truly reflect the world as it is today.

When asked, observers often cite GDP per capita or poverty rates as the main variables separating developed from emerging markets.

Yet they quickly realize that countries like the UAE, South Korea and Czechia are still classified as emerging markets, despite having income levels comparable to, or even higher than, developed-market countries such as Spain, Italy or New Zealand.

Attention then shifts to the structure of the economy. There is a lingering misconception that emerging markets are relics of the past, characterized by low levels of industrialization. But Taiwan and Korea’s semiconductor leadership is powering the global artificial intelligence revolution, with competing countries not coming close. Brazil’s advanced aerospace industry has produced the world’s best-selling executive jet for the last 14 years. China’s operational stock of about 2 million industrial robots is almost five times larger than Japan’s. Turkey has become one of the leading exporters of military drones in the world.

These success stories show that the idea that emerging economies are deserts of innovation or competitive success is entirely outdated.

What about macroeconomic instability and high inflation? Most emerging markets have learned from past mistakes and are now taking central bank independence and, to some extent, fiscal responsibility much more seriously.

On the monetary policy side, when inflation spiked after COVID-19, emerging market central banks responded proactively, raising rates well ahead of their developed market peers and solidifying their inflation-fighting credentials. Latin American central banks in particular, with fresh memories of past inflationary episodes, remain among the most proactive globally. Figures such as Peru’s central bank president Julio Velarde are consistently regarded as some of the best central bankers of their generation.

When it comes to fiscal dynamics, here is a thought experiment: take two lists of countries, one of so-called “emerging” markets, the other of “developed” markets, spanning the Americas, Europe, and Asia. Now ask your favourite AI tool: which group is more fiscally responsible? In other words, which has more sustainable public finances, Chile, Poland and Malaysia, or the US, France and Japan?

When I ran this exercise, the AI model delivered a thorough analysis and concluded: “Bottom-line winners: Chile, Malaysia and Poland.”

How did AI get there? By weighing the same variables my team tracks daily: debt to GDP, deficit to GDP, interest to revenue, debt maturity and currency mix, the credibility of fiscal institutions, market access, borrowing costs and more.

Of course, Chile, Poland, and Malaysia are all investment-grade. But even in the high-yield segment, emerging markets are surprising for their fiscal discipline. Take Argentina: the IMF estimates it will deliver a primary fiscal surplus of 1.4% of GDP this year. Fiscal surpluses are nearly impossible to find in most of the developed world today.

This shift has helped curb the boom-bust cycles of previous decades and led to more stable inflation rates. For example, the median inflation rate for the 24 countries in the MSCI Emerging Markets Index was just around 2.5% in 2025.

Historically, high political uncertainty was a defining feature of emerging markets. Yet, a quick glance at recent global events shows that such uncertainty is now widespread across all geographies. Elections in North America and Europe have become nail-biting, market-moving events.

One area where differences between developed and emerging markets remain significant is capital market depth and asset price volatility. The median emerging market country accounts for just 0.1% of global equity market capitalization, with the largest still representing only around 3%. Shallower capital markets tend to experience greater price swings, and equity market volatility in emerging markets remains higher than in developed markets.

Yet even here, the picture is becoming more nuanced. Take currencies, for example. Since the start of 2025, volatility in emerging market currencies has trended lower and, on average, sits below that of G7 currencies.

The world has changed, and the old boundaries between developed and emerging markets are fading fast. Investors who cling to outdated definitions risk missing the most dynamic opportunities of our time. The next decade will belong to those who recognize this shift, embrace new realities and position their portfolios for a world where yesterday’s “emerging” markets are tomorrow’s leaders.