“Frontier market” economies—a cluster of mostly middle-income economies regarded as the proving ground for the next generation of economic superstars—have largely failed to live up to their potential in recent decades, a new World Bank study has found. On average, investment growth per person in the 2020s so far has been less than half the rate in the 2010s. Yet the experience of the top performers among frontier markets reveals lessons for the 56 economies currently in the cluster.

For global investors looking for opportunities beyond high-income economies, frontier markets constitute the middle of the range: 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. The creation of these two asset classes in the 1980s and 1990s—an initiative that was greatly aided by the World Bank Group’s International Finance Corporation—helped channel significant private investment flows into developing countries.

“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. “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.

Frontier markets today are home to 1.8 billion people—a 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 a 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. They often boast stronger institutions than other developing economies. In addition, they hold a special appeal for investors: over the past 25 years, stocks in frontier markets have moved largely independently of global financial conditions, which have explained only one in eight of the ups and downs in frontier-market stocks, far less than in advanced economies or emerging markets.

“These economies will play an important role in addressing the jobs challenge facing developing economies—they will account for nearly a fifth of the 1.2 billion young people in developing countries who will reach working age in the next decade,” said M. Ayhan Kose, the World Bank Group’s Deputy Chief Economist and Director of the Prospects Group. “The top-performing frontier markets have followed different paths. But they’ve converged on some common strategies—growth-friendly policies, investment-supporting infrastructure, better fiscal management, and an institutional environment that attracts private investment. The payoffs have been large: per capita income in the top quarter nearly quadrupled over the past 25 years.”

The typical frontier-market economy, however, has made little progress in attracting investment since 2000. 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, less than half the rate in the previous two decades. Frontier-market economies today account for just 3.1% of global capital inflows, and less than 5% of global economic output.

Measured by laws on the books, frontier markets have made substantial progress in opening up their financial markets the past 25 years: they are now about half as open as advanced economies, up from about one-fifth as open in 2000. Actual financial-market development, however, 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.

Greater fiscal discipline will be key to frontier markets delivering on their potential in the years ahead. Government spending as a share of GDP has been rising, but revenues have remained flat. The result has been a surge in debt burdens—and debt defaults. Today the typical frontier market spends more on net interest payments on its debt—about 2.5% of GDP—than is the case among emerging markets or other developing economies. 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.

Even so, some frontier markets have done better at navigating such pitfalls. Viet Nam, one of the world’s poorest countries at the turn of the century, now ranks among the 10 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, relying heavily on tourism and other services. In addition, four frontier markets—Bulgaria, Costa Rica, Panama, and Romania—have attained high-income status since 2012. To make the most of their potential, these economies will need to do much more than simply open up their markets. They will need to develop them and create the institutional safeguards needed to manage them.