IN JULY 2008 outraged investors in Karachi, Pakistan’s commercial capital, pelted the local stock exchange with stones after a plunge in share prices. In Lahore investors blocked the road to the city’s exchange with burning tyres. In Islamabad a mob set fire to share certificates. The panicked exchanges simply prohibited further declines, imposing a “floor rule” that barred prices from falling below the level of August 27th 2008.

Emerging markets are, by definition, edgier places to invest than developed ones. But not anything goes. A prominent emerging-market benchmark compiled by MSCI, an index provider, includes only 23 stockmarkets that satisfy its criteria for size, liquidity and openness to foreign investors. Those that do not make the cut are relegated to an index of “frontier markets” or left out of MSCI’s international indices altogether. That was Pakistan’s fate in December 2008, when it was stripped of emerging-market status.

The countries that still carry that status are an odd mix. Some are surprisingly wealthy: Qataris are richer than Americans. Others are strikingly poor. India, for example, has...Continue reading