Economies long touted as the next wave of global growth engines have largely failed to deliver on that promise over the past quarter century, according to a new World Bank report, raising fresh questions about how developing countries can harness global capital while avoiding repeated debt crises.

So-called “frontier market” economies – a group of mostly middle-income countries with limited but meaningful access to international financial markets – have seen a sharp slowdown in investment growth and an increase in fiscal and financial vulnerabilities, despite gains in education, life expectancy and policy frameworks, the report found.

Average investment growth per person in frontier markets has dropped to about 2% so far in the 2020s, less than half the pace recorded in the previous two decades, according to the study. Since the COVID-19 pandemic, these economies have accounted for more sovereign debt defaults than all other countries combined.

“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,” said Indermit Gill, the World Bank Group’s chief economist and senior vice president for development economics, in a press release.

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

Middle ground for investors

Frontier markets occupy a niche between emerging markets and poorer developing economies. They are less integrated into global financial markets than emerging markets, but more open than countries that fall outside both categories.

The asset class emerged in the late 1980s and 1990s, alongside the creation of emerging market benchmarks, an effort strongly supported by the World Bank Group’s private-sector arm, the International Finance Corporation, to channel private capital into developing countries.

Today, 56 economies are classified as frontier markets. Together they are home to about 1.8bn people – roughly one-fifth of the world’s population – and that share is expected to rise sharply. Over the next 25 years, frontier markets are projected to add nearly 800mn people, more than the rest of the world combined.

For investors, frontier markets have often been marketed as offering diversification benefits. Over the past 25 years, global financial conditions have explained only about one-eighth of the fluctuations in frontier-market stock prices, far less than in advanced economies or emerging markets, according to the report. 

However, those advantages have not translated into sustained development gains. Despite their growing populations, frontier markets today account for just over 5% of global economic output and around 3.1% of global capital inflows, the World Bank said.

Investment slowdown, rising debt

The most striking trend identified in the report is the steady decline in investment growth per capita since 2000. While investment growth averaged more than 5% per year in the 2000s, it slowed in the 2010s and fell further in the early 2020s.

That slowdown has occurred even as frontier markets have become significantly more open to capital flows. Measured by laws and regulations, these economies are now about half as financially open as advanced economies, up from roughly one-fifth in 2000. Actual financial development, however, has lagged behind.

Domestic financial markets remain shallow, local-currency bond markets are underdeveloped, and banks lend less to households and businesses than in emerging markets, the report found. Lending-deposit spreads remain wide, raising the cost of capital and limiting the ability of firms to invest productively.

At the same time, fiscal pressures have intensified. Government spending has risen as a share of GDP across frontier markets, while revenues have largely stagnated. The result has been a surge in public debt and debt-servicing costs.

The typical frontier market now spends about 2.5% of GDP on net interest payments, more than emerging markets or other developing economies, and nearly 40% of frontier markets defaulted at least once between 2000 and 2024. Since the pandemic, defaults in frontier markets have outnumbered those in all other country groups combined.

Demographics dividend

Frontier markets are expected to account for nearly a fifth of the 1.2bn young people in developing countries who will reach working age over the next decade. By 2035, around 230mn young people are projected to enter the labour force in frontier markets alone.

“These economies will play an important role in addressing the jobs challenge facing developing economies,” said M. Ayhan Kose, the World Bank Group’s deputy chief economist.

Many frontier markets also possess natural resources critical to the global energy transition and new technologies, including minerals used in renewable energy, telecommunications and consumer electronics.

In theory, those advantages could deliver a sizeable demographic dividend. In practice, insufficient job creation and weak investment have limited the gains.

Although poverty rates in frontier markets have more than halved since 2000, they remain about five times higher than in emerging markets, and progress has slowed over the past decade, the report said.

Vulnerability to capital swings

The report also highlights the risks that accompany partial financial integration. Capital inflow surges have typically been associated with stronger output growth in frontier markets, suggesting that access to global finance can boost growth. But those surges are often followed by sudden stops, which tend to coincide with economic slowdowns.

Frontier markets are particularly vulnerable to such shocks because of their external exposure. Portfolio flows are more volatile than in emerging markets, export bases are more concentrated, and a larger share of public and private debt is denominated in foreign currencies, increasing balance-sheet risks.

Foreign exchange reserves are generally lower, leaving governments with limited buffers to absorb shocks.

“These features increase uncertainty for firms and investors, raise external financing costs, and amplify the adverse effects of shocks,” the report said.

Lessons from top performers

Despite the gloomy aggregate picture, the World Bank identified a group of frontier markets that have significantly outperformed their peers.

The top quarter of frontier markets by per capita income growth nearly quadrupled their incomes over the past 25 years, the report said. These economies followed different development paths but shared several common features.

They recorded faster growth in investment and capital stock per person, improved governance and institutions, narrowed banks’ lending-deposit spreads, and contained government debt and debt-service burdens.

Vietnam, one of the poorest countries in the world at the turn of the century, now ranks among the 10 fastest-growing economies of the past 25 years, driven by export-oriented manufacturing and integration into global supply chains.

Rwanda, emerging from civil war in the 1990s, has become one of sub-Saharan Africa’s strongest performers, relying heavily on tourism and services while maintaining tight fiscal discipline.

Other frontier markets pursued resource-led growth strategies. Kazakhstan, for example, attracted investment into energy and commodities, while strengthening macroeconomic management.

Four frontier markets – Bulgaria, Costa Rica, Panama and Romania – have reached high-income status since 2012, graduating from the frontier category altogether.

The report cautioned against one-size-fits-all prescriptions, noting the diversity of frontier markets in geography, income levels and institutional capacity.

“To make the most of their potential, these economies will need to do much more than simply open up their markets,” the report said. “They will need to develop them – and create the institutional safeguards needed to manage them.”

Policy priorities identified by the World Bank include strengthening domestic financial systems, improving fiscal discipline, building credible policy frameworks, and investing in infrastructure and human capital to support productivity and job creation.

Advancing financial integration, the report said, can still deliver growth benefits – but only if frontier markets are better equipped to absorb capital inflows and withstand inevitable shocks.

“Realising frontier markets’ potential is essential not only for these economies,” according to the World Bank report, “but also for global job creation and development progress.”