Developing nations that can’t make the grade as emerging markets fall into a chaotic Fourth World category known as “frontier markets.” This is a world where insider trading can run rampant because it’s officially tolerated, where financial data are spotty because the authorities don’t demand clarity, and where the worst risks call for armed bodyguards. My team’s security details in Pakistan suggest that in hotel lobbies you should always sit in a small chair, not a couch, so you can quickly pull the furniture over you in case of an explosion. Research on the frontier is often conducted by pressing one’s ear to the walls: when one of my analysts recently asked a member of the crowd milling aimlessly around the Kuwait stock exchange what they were waiting for, the reply was, “Rumors.”

Frontier markets are an object of growing fascination because so many investors are now looking for returns that don’t track the Western markets. In the last decade major emerging markets stopped following unique paths and began rising and falling in unison, as if globalization itself had become a mystical life force. In the first half of 2011, the difference between the best and worst stock market returns in the ten biggest emerging economies was just 10%, a record low. In the 1990s, the typical spread was 100% over a similar time period. Now many economists seem to think this “convergence” force is real, and that all emerging markets will continue to grow rapidly, catching up with income levels in the West.

The term “frontier market” has come into regular use only since about 2007, and the simplest way to think about these nations is that they are open to foreign investors but do not follow orthodox market rules. This state of semi-lawlessness makes them unpredictable lands of huge risks and quick fortunes, with economic growth rates that over 2010 ranged from a high of 20% in Ghana to a low of 2% in Serbia, compared to the much narrower range in big emerging markets, from 9% in China to 3% in South Africa. The frontier stock markets magnify those gaps, ranging in 2010 from a gain of 80% in Sri Lanka to a loss of 20% in Bulgaria, while the major emerging markets produced a maximum gain of 20% in India and no gain in Brazil.

The boundaries of the Fourth World are defined not by poverty but by rule of law or the lack of it. The frontier is home to countries with average incomes under $1,500 but also the richest nation in the world, Qatar, with an average income around $100,000. Only about 50 countries are classified as developed or emerging, while around thirty-five are on the (constantly changing) frontier list and nearly one hundred (including Paraguay, Senegal, and Turkmenistan) are beyond category, off the maps of the most intrepid investors.

In the Fourth World, markets tend to follow the whim of local leaders. The 2009 bursting of Dubai’s huge debt bubble came only days after the ruling sheikh had passionately assured investors that his emirate’s troubles were overblown. Cambodia opened its stock exchange in July 2011 for reasons that remain unclear: there were no companies ready to list, making it the only exchange in the world with zero trading.

It’s tough to understand market realities in an environment where rich pickings don’t necessarily yield richer choices. Ukraine lists more than five hundred companies, but this is the unnatural result of a strategy Ukraine adopted from Russia, no one else’s model for a stock exchange. In an attempt to create a vibrant market, Ukraine in 2008 simply required any company with more than one hundred shareholders, and all banks, to sell stock to the public. Many companies sold only a tiny portion of their stock, to comply with the rules, but with no real commitment to generating a return for shareholders. Not surprisingly Ukrainian companies that want to be taken seriously go public in London or Warsaw, and trust in the local market is minimal. This has real consequences: Ukraine was the hardest-hit nation in the crisis of 2008, when the economy contracted by 20% and the stock market fell 90%.

The region most isolated from global norms is the Middle East, where Iraq, Iran, and Syria are still closed to outsiders, and the key frontier markets are the petro-monarchies, led by Saudia Arabia. In 2005, the Saudi market inflated to become the largest in the emerging world. At its peak one in five Saudis was day trading and the insanity was a good deal crazier than the dotcom mania that gripped the United States a few years before. Saudi teachers were publicly admonished not to the trade on the job, but when the bubble popped no one outside the Gulf paid much attention, because only Gulf investors are allowed in.

In nations that attract a lot of foreign investment and trade, leaders have limited ability to defy global convention, yielding the increasingly common phenomena of radical candidates moving toward the economic mainstream when they take office. (This was the trajectory of Ignacio Lula da Silva in Brazil, and Jacob Zuma in South Africa, among others). On the frontier market orthodoxy exerts less force, and when things start to go badly, leaders may simply close local stock markets, hoping the crisis will pass. This is the financial policy equivalent of curling into a fetal position. It can temporarily halt a crash, but almost always at the expense of an even worse crash when the market reopens. In recent years we’ve seen this in Nigeria, Pakistan and Egypt.

There is a widespread perception that poor nations are rising en masse, and for a while in the last decade they did. Ignited by easy money pouring out of the United States, the average growth rate of emerging markets doubled to 7.2% between 2003 and 2007, and in the peak year of 2007 all but three of the world’s 183 economies grew, with 114 growing at faster than 5%—up from an average of about 50 in the prior two decades. This was an unprecedented boom, in breadth and speed, but now the easy money is drying up, and the historical norm is returning. The race to “catch up” to the West is so difficult that by 2011, the average per capita income in emerging markets had climbed, relative to the average in rich nations, only back to where it was in 1950.

At least as many economies are falling as rising. In 2009 Pakistan and Argentina were demoted from emerging to frontier status for slapping controls on trading or capital movements. Demotion was a sharp insult to a former economic star like Argentina, but it could have been worse. Venezuela was demoted from emerging status to no market status at all, due to the erratic behavior of President Hugo Chvez, who has been making increasingly transparent attempts to seize political control of his nation’s oil wealth.

The frontier markets are home to one billion of the world’s six billion people, but they account for just 5% of global GDP and 0.5% of global investment. Most economists believe that, over time, the frontier shares of the economy and money flows will grow, and that view is probably correct. In frontier nations, leaders can unleash explosive growth just by getting a few reforms right. Where nations are emerging from bouts of ethnic strife (like Kenya) or civil war (like Sri Lanka), just the absence of conflict can unleash growth. Nations now off the market radar, perhaps most strikingly Angola, the second-largest oil producer in Africa, could get a huge investor response the first day they open a stock market. But it will be a wild ride.