Emerging Markets:
A Decisive Decade

Emerging markets will play a crucial role in shaping the global economy over the next decade, averaging 4.06% GDP growth through 2035, compared with 1.59% for advanced economies. By 2035, emerging markets will contribute about 65% of global economic growth. This growth will be driven mainly by emerging economies in Asia-Pacific, including China, India, Vietnam and the Philippines. Also by 2035, India will be cemented as the world’s third-largest economy, with Indonesia and Brazil ranking eighth and ninth, respectively. 

Despite their potential, emerging markets’ growth will not be enough to match the per capita incomes of advanced economies (except for Saudi Arabia, Hungary and Poland). By 2035, the average GDP per capita in purchasing power parity for emerging markets will stand at 37% of that of advanced economies. As noted in this Look Forward Journal (see “Which emerging markets will climb the income ladder?” to learn more), faster income per capita convergence with advanced economies will be predicated on advancements in productivity growth across emerging economies. Their projected economic growth and importance will nonetheless drive future investment and significant growth opportunities. 

As global fertility rates decline, emerging economies have a unique opportunity to capitalize on their demographic bonus. Over the coming decade, most emerging markets will benefit from supportive demographics, with old-age dependent populations averaging 24% through 2035. This favorable demographic trend will expand their labor force and consumer markets. However, notable exceptions include China, Poland, Thailand and Hungary, all facing faster-aging populations. By 2050, emerging markets’ old-age dependency ratio is expected to reach 35%, still well below the 50% expected for high-income countries. 

Despite these advantages, the increasing dependent population will strain health services and fiscal accounts due to rising pension expenditures. To sustain a productive workforce, emerging markets must dedicate significant attention and resources to develop skills through education and technology.

Technological developments can boost emerging markets’ productivity and, consequently, economic growth. However, in most emerging economies, research and development investment has been historically low, resulting in a lag in technological progress and adoption. 

Over the coming decade, developments in AI, automation and advanced robotics will likely disrupt labor dynamics. These developments may impact emerging markets less than advanced economies due to the lower percentage of highly skilled workers in the former, resulting in an uneven boost in productivity that favors advanced economies. International Monetary Fund research shows that emerging markets are less prepared for AI adoption, which could worsen global inequality. 

New manufacturing technologies might also incentivize corporations to reshore production, particularly away from emerging markets exposed to higher political, operational and security risks (see “Competing with the future: Creating supply chain competitive advantage” to learn more). Accelerating technology adoption and digitalization of processes could improve emerging markets’ productivity, which — combined with positive demographics — could bolster economic growth further over the coming years.

Global efforts to accelerate the energy transition and achieve sustainable development goals will boost demand for critical minerals. Copper, cobalt, nickel and lithium, in particular, are essential in electric vehicle and battery production, as well as other key components for producing renewable energy. Such demand growth will be exponential. 

A joint study from S&P Global Market Intelligence and S&P Global Commodity Insights on copper and the energy transition found that copper demand — key for electrification — is projected to double from 25 million metric tons (MMt) today to about 50 MMt by 2035. In the case of lithium, a 2021 European Parliament report stated that for Europe to meet its energy transition targets, demand would need to increase 18 times by 2030 and 60 times by 2050. 

Leaders in mining and processing minerals for the energy transition include China (copper, cobalt, nickel and lithium), Chile (copper and lithium), Peru (copper) and Indonesia (nickel). Initiatives across advanced economies aim to diversify supply and secure strategic access to these minerals, likely boosting investment in emerging markets with large reserves. These initiatives include the Minerals Security Partnership and the US Inflation Reduction Act, which extends benefits to countries that have free trade agreements with the US. 

To take advantage of foreign investment opportunities, some emerging markets are already creating new incentives through policy changes and infrastructure improvements.  

The Indonesian government banned nickel exports to foster domestic higher-value processing and sought to create an EV supply chain by introducing supportive policies to attract manufacturers and battery-makers. These policies include a lower value-added tax on EVs, labor liberalization and reduced corporate taxes. 

In Latin America, Argentina is seeking to boost development of its lithium sector by promoting private sector investment through an investment attraction scheme known as Régimen de Incentivo para Grandes Inversiones (RIGI), applicable to strategic sectors, including mining. Chile has one of the world's largest reserves of lithium, a mineral classified as strategic, with the state playing a major role in its development but also allowing associations with the private sector. 

Sub-Saharan African countries with significant reserves of copper and cobalt, such as the Democratic Republic of Congo, are also seeking to address pervasive infrastructural deficits to attract more foreign investment. 

Extreme weather conditions and worsening physical risks will likely remain a constant source of disruption for years to come, generating economic and financial losses. Supply chain disruptions and infrastructure damage associated with physical risks such as extreme heat, water stress, drought, flooding, wildfires and tropical cyclones have now become increasingly common. By 2050, if global warming does not stay well below 2 degrees C, absent adaptation, we estimate that up to 4.4% of the world's GDP could be lost annually. 

Emerging and frontier markets are among the most exposed globally. Their exposure to these risks will test their economic resilience and adaptability. According to the United Nations Environment Programme Annual Report 2023, estimated annual adaptation needs range from $215 billion to $387 billion (i.e., 0.6%-1% of frontier economies’ GDP) per year for this decade. As a result, vulnerable countries could continue to fall behind their wealthier counterparts, leaving their population and economic development efforts exposed to accelerating physical climate risks.

Adapting and building resilience to the physical impacts of climate change remains highly location-specific. Investment needs will manifest differently in terms of hazard type and impact. Storms will typically remain more prominent in South Asia, East Asia and Pacific, and the Caribbean than in land-locked nations in Central Asia, the Middle East and North Africa, and sub-Saharan Africa. Economic losses due to water stress — a chronic risk that materializes slowly over time — will be particularly pronounced in Mexico, southern Argentina, India, the Middle East and North Africa, and southern Africa.

Nearshoring and friendshoring have gained attention as supply chain disruptions during the COVID-19 pandemic prompted manufacturers to diversify their operations’ locations. Strategic competition between the US and China and the impact of Russia’s invasion of Ukraine have also encouraged companies to reconfigure their supply chains. 

Mexico's long-standing manufacturing ties with, and access to, the US market make it an obvious potential beneficiary for nearshoring. The impact on Mexico's economy could be substantial even if only a small fraction of manufacturing production is shifted into the country from other hubs. However, Mexico faces significant challenges to reaping the benefits of nearshoring that, if not addressed, could undermine its growth potential over the next decade. These include inadequate infrastructure, security concerns and a lack of political impetus for regulatory improvements and initiatives to attract foreign direct investment. 

The global relocation of supply chains will also benefit Vietnam. The country’s ties with the US have been developing quickly, even before the pandemic. Vietnam’s exports to the US have increased fourfold since 2013 and accelerated following tariffs imposed on China in 2018. The country became the seventh-largest goods supplier to the US in 2023. We estimate that Vietnam could become one of the fastest-growing emerging markets by 2035, buoyed by policy consistency and a focus on reinforcing its trade potential. Vietnam’s strong presence in evolving global supply chains will be determined by sustained progress in addressing infrastructural, labor and resource constraints. 

India is poised to be the fastest-growing major economy over the next three years and the third largest globally by 2030. Its 2024 entry into JP Morgan’s Government Emerging Market Bond Index could provide additional government funding and unlock significant resources in domestic capital markets. This is only a first step — investors will continue looking for improved market access and settlement procedures. 

India has also taken measures to improve its weak fiscal flexibility by boosting its capital expenditure, further supporting long-term growth. But population challenges are meaningful, with the country expected to have the world’s largest population by 2035. This presents mounting challenges in basic service coverage and growing investment needs to maintain productivity.

Emerging markets are navigating an evolving geopolitical environment, where disruption will likely remain a constant and alliances more fluid. Policymakers — especially in advanced markets — are less willing to embrace free trade and instead orient their policies around strategic competition. 

Many emerging markets are positioning themselves to leverage this as an opportunity to rebalance, creating more resilience through diversification of partners. Still, emerging economies will be exposed, by varying degrees, to the immediate disruptive impacts of unresolved and latent armed conflicts as well as the increasing national security considerations underpinning economic and trade policies. How adeptly emerging markets traverse these more volatile dynamics will determine growth prospects as trade and investment flows recalibrate. 

Our trade-related data highlights that the US and China are primarily either the main or second trade partner for most emerging markets. This strategic rivalry could increase pressure for emerging economies to curb flexibility in trade relations and investment on areas considered to be strategic (manufacturing, EVs, critical minerals, telecommunications, ports, electricity transmission, etc.), which would likely make the path to achieve their accelerated growth ambitions more challenging. To date, the behavior of most emerging markets highlights that hedging between the US and China to deepen trade links or secure capital will continue over the next decade, as will expanding trade linkages within respective regions and across emerging markets. 

Two global trends to watch that will particularly impact emerging markets are the rise of industrial policy within advanced economies and the emergence of extraterritorial legislation. 

As advanced economies increase subsidies to protect strategic sectors, secure jobs and boost technological innovation, the ability of emerging markets to compete on a level playing field will be compromised. Similarly, the emergence of extraterritorial legislation, particularly from the EU, will add another layer of complexity to attracting investment. Legislation such as the EU’s Corporate Sustainability Due Diligence Directive (CS3D) will provide an opportunity for emerging markets to adapt operations and supply chains to the EU’s environmental, labor and human rights standards. Companies operating in emerging markets will need to conduct due diligence to ensure such standards are met across operations and supply chains. 

Emerging markets struggling to adapt, however, will likely face foreign direct investment limitations. Rather than risk fines of up to 5% of net worldwide turnover, companies operating in CS3D-transgressing jurisdictions might opt for ceasing operations. Emerging markets’ willingness to work with the private sector and their ability to maintain a stable, predictable environment and plan for the future (see “Planning for the future: Growth targets for the next decade” to learn more) will be key over the next decade.