Frontier market economies - a cluster of 56 mostly middle-income economies - have on average achieved less than half the rate of investment growth per person in the 2020s than the rate achieved in the 2010s, says international finance institution the World Bank.

Over the past 25 years, the growth rate of investment per person in these economies has ratcheted down, dropping to just 2% in the 2020s, which is less than half the rate in the previous two decades.

“Excluding a handful of economies that have become investment-grade over the past 25 years, frontier markets may well be the biggest disappointment in economic development,” says World Bank Group chief economist and development economics senior VP Indermit Gill.

People in frontier markets are, on average, better educated and live longer than those in other developing economies. The quality of their policies and institutions is better. Some of them are rich in natural resources.

“But they haven’t converted these advantages into advancement and they remain the developing world’s lowest-hanging fruit,” he emphasises.

These economies will also play an important role in addressing the jobs challenge facing developing economies, as they will account for nearly one-fifth of the 1.2-billion young people in developing countries who will reach working age in the next decade, says World Bank Group deputy chief economist and Prospects Group director M Ayhan Kose.

The typical frontier market economy has made little progress in attracting investment since 2000. Frontier-market economies currently account for 3.1% of global capital inflows and less than 5% of global economic output.

However, the experience of the top performers among the frontier markets provides lessons for the 56 frontier market economies currently in the cluster.

“The top-performing frontier markets have followed different paths, but have converged on some common strategies, namely growth-friendly policies, investment-supporting infrastructure, better fiscal management and an institutional environment that attracts private investment.

“The payoffs have been large, with per capita income in the top quarter having nearly quadrupled over the past 25 years,” says Kose.

Additionally, greater fiscal discipline will be key to frontier markets delivering on their potential in the years ahead.

This is because government spending as a share of GDP has been rising, but revenues have remained flat, and the result has been a surge in debt burdens and debt defaults.

Currently, the typical frontier market spends more on net interest payments on its debt, or about 2.5% of GDP on average, than is the case among emerging markets or other developing economies, he points out.

Additionally, nearly 40% of frontier markets defaulted at least once between 2000 and 2024. Since the Covid-19 pandemic, frontier markets have recorded more defaults than all other countries combined, Kose notes.

However, some frontier markets have done better at navigating such pitfalls. Viet Nam, which had been one of the world’s poorest countries at the turn of the century, now ranks among the ten fastest-growing economies of the past 25 years.

Rwanda emerged from civil war in the 1990s to become one of sub-Saharan Africa’s biggest economic success stories by relying heavily on tourism and other services.

Additionally, four frontier markets, Bulgaria, Costa Rica, Panama and Romania, have attained high-income status since 2012.

To make the most of their potential, frontier market economies will need to do much more than simply open up their markets, and will need to develop them and create the institutional safeguards needed to manage them, the World Bank recommends.

FRONTIER MARKET ECONOMIES
Frontier markets today are home to 1.8-billion people, or one-fifth of the world population, and they are expected to add nearly 800-million more over the next 25 years, more than the rest of the world combined.

More than one-third of frontier markets are in sub-Saharan Africa. Many frontier markets are rich in minerals that will be needed for new technologies concerning renewable energy, telecommunications and consumer electronics.

Frontier market economies often boast stronger institutions than other developing economies.

Additionally, they hold a special appeal for investors including that, over the past 25 years, stocks in frontier markets have moved largely independently of global financial conditions. This explains why they only have one in eight of the ups and downs in frontier-market stocks, which is far less than in advanced economies or emerging markets.

For global investors looking for opportunities beyond high-income economies, frontier markets constitute the middle of the range, as they are generally less tightly integrated into global financial markets than emerging markets, but more so than other developing economies that belong to neither the emerging nor the frontier classes.

Further, as measured by laws on the books, frontier markets have made substantial progress in opening up their financial markets in the past 25 years, and they are now about half as open as advanced economies, and up from about one-fifth as open as advanced economies in 2000.

However, actual financial-market development in frontier market economies has been sluggish. Domestic-currency markets, for example, remain relatively underdeveloped and domestic banks and financial institutions tend to lend less to private households and businesses than they do in emerging markets, the World Bank says.