Frontier Markets at a Crossroads: Untapped Potential and the Path to Renewal
A new World Bank report finds that “frontier market” economies—mostly middle-income countries once seen as the proving ground for the next generation of economic powerhouses—have largely fallen short of expectations in recent decades. So far in the 2020s, investment growth per person has dropped to less than half the pace recorded in the 2010s, highlighting a widening gap between potential and performance.
For global investors seeking opportunities beyond high-income economies, frontier markets occupy a middle ground. They are generally less integrated into global financial markets than emerging markets, yet more connected than other developing economies outside both classifications. The creation of the “emerging” and “frontier” asset classes in the 1980s and 1990s—strongly supported by the World Bank Group’s International Finance Corporation—helped channel substantial private capital into developing countries.
According to Indermit Gill, Chief Economist and Senior Vice President for Development Economics at the World Bank Group, frontier markets—aside from a handful that achieved investment-grade status over the past 25 years—may represent one of the biggest disappointments in modern development. On average, people in these economies are better educated and live longer than those in other developing countries. Policy frameworks and institutions are relatively stronger, and many possess abundant natural resources. Yet these advantages have not translated into sustained economic advancement.
Today, frontier markets are home to 1.8 billion people—about one-fifth of the global population—and are projected to add nearly 800 million more over the next quarter century, exceeding population growth in the rest of the world combined. More than one-third of these economies are located in Sub-Saharan Africa. Many are rich in minerals essential for renewable energy technologies, telecommunications, and consumer electronics.
They also offer a distinctive appeal to investors. Over the past 25 years, frontier-market stocks have moved largely independently of global financial conditions, with external factors explaining only about one in eight fluctuations—far less than in advanced or emerging markets.
M. Ayhan Kose, Deputy Chief Economist and Director of the Prospects Group at the World Bank, noted that frontier markets will play a critical role in addressing the employment challenge in developing economies. Nearly one-fifth of the 1.2 billion young people in developing countries who will reach working age in the next decade live in frontier markets. While the top performers have followed diverse development paths, they share key elements: growth-oriented policies, investment-supporting infrastructure, sound fiscal management, and institutional environments that attract private capital. The results have been striking—per capita income in the top quartile of frontier markets has nearly quadrupled over the past 25 years.
However, the typical frontier economy has made limited progress in attracting investment since 2000. Investment growth per person has steadily declined over the past quarter century, falling to just 2 percent in the 2020s—less than half the rate of the previous two decades. Collectively, frontier markets account for only 3.1 percent of global capital inflows and less than 5 percent of global economic output.
Although these economies have made significant strides on paper in liberalizing financial markets—now roughly half as open as those in advanced economies, compared to about one-fifth as open in 2000—actual financial development has lagged. Domestic currency markets remain shallow, and banks and financial institutions lend less to households and businesses than their counterparts in emerging markets.
Strengthening fiscal discipline will be critical for unlocking future growth. Government spending as a share of GDP has risen, while revenues have stagnated, leading to mounting debt burdens and a wave of defaults. Frontier markets now spend about 2.5 percent of GDP on net interest payments—more than emerging markets and other developing economies. Nearly 40 percent defaulted at least once between 2000 and 2024, and since the COVID-19 pandemic, they have recorded more defaults than all other countries combined.
Despite these challenges, success stories stand out. Viet Nam has transformed itself from one of the world’s poorest countries at the turn of the century into one of the ten fastest-growing economies over the past 25 years. Rwanda emerged from civil war in the 1990s to become one of Sub-Saharan Africa’s leading economic success stories, driven largely by tourism and services. Meanwhile, Bulgaria, Costa Rica, Panama, and Romania have all achieved high-income status since 2012.
The report concludes that opening markets is not enough. Frontier economies must deepen and strengthen their financial systems, enhance institutional safeguards, and build the governance frameworks needed to manage openness effectively. The potential remains significant—but realizing it will require deeper, sustained reform.
Full report: https://www.worldbank.org/gep