Time to Rethink “Emerging Markets”

Time to Rethink “Emerging Markets”

Is the term emerging markets obsolete?

Nicholas Spiro, a London-based partner at Lauressa Advisory, makes this point in an op-ed for The South China Morning Post, one of the leading English-language newspapers in the Asia-Pacific region. Spiro lays out a convincing case on why we should rethink the label “emerging markets,” citing factors such as a lack of political risk (especially as compared to more developed economies), a more comprehensive risk assessment process, and a more resilient market.

I have to say that I agree. The developed/emerging markets dichotomy is rapidly losing its relevance, thanks to a confluence of geopolitical factors, such as increasing instability in developed economies, the Great Recession of 2008, and the rising affluence (and nascent middle class) of many emerging markets.

Instability in developed economies

The most obvious indicator of the turmoil in developed economies is the global populist wave that swept through the Western world from 2016-17.  In a shock to the global economic system (as well as to pundits the world over), voters in the United Kingdom approved Brexit, while Americans voted Donald Trump into office.

Though the causes continue to be debated by researchers, the root of this social instability is economic and financial. Essentially, voters were fed up with rising inequality, driven in large part by ill-planned free trade agreements, a growing gap between rich and poor, and a declining middle class. Given that the existing political establishment failed to offer up relevant solutions that could grow wages, create jobs, and revive shattered communities, citizens in these economies voted for shock therapy in the form of Trump and Brexit–a radical departure from the political and economic norm.

The rising middle class of developing countries…

In contrast, citizens in emerging economies are seeing great improvements to their way of life. In China, for instance, the middle class is booming: by some estimates, from 2000 to the present day, twice as many Chinese as Americans have entered the middle class, while numerically, the nation has more billionaires than the United Statesespecially self-made female ones.

But more important than the numbers may be perception: unlike the developed economies, the people of emerging markets still believe in opportunity, entrepreneurialism, and the value of hard work–traits which were formerly the sole preserve of the American Dream. In fact, this perception has become so widespread that it has even been deemed the Chinese Dream, a direct corollary of its American counterpart–and arguably, still achievable in China.

More importantly, it’s not just China–emerging economies, on the whole, grow faster than developed ones. India, for instance, continues its impressive growth, despite some slowing over the past year. Despite all that, India’s 6.6% growth rate is particularly high–particularly when compared to the United Kingdom’s paltry 0.3% growth rate, slowed as it was by inflation, slowing employment, and wage growth. The US economy didn’t do much better, unfortunately: in 2017, first-quarter growth was only 0.7%, though many analysts believed that this slowdown was only temporary.

Coping in a recessionary world

Emerging economies have also been noted for their resilience and flexibility–both after events like Brexit and the 2016 Trump election, as well as the 2008 Recession, which continues to cast a pall over the global economy.

Though the Global Recession hit emerging markets as hard as developed ones, emerging markets recovered far more quickly. Researchers found that by September 2009, less than a year after the first shocks began, emerging markets had recovered much of their pre-crisis levels of industrial production. As late as November 2010, emerging markets were only 7 percentage points below trend, while advanced economies remained at 16 percentage points–nearly double the losses of their “emerging” counterparts.

According to one paper by a team of IMF economists, the reason for the resilience of emerging markets may be twofold: improved policymaking and less frequent shocks (at least where it concerns huge, world-altering events like banking crises and credit booms). For instance, many emerging markets have moved away from hard exchange rate pegs (China, for instance, stopped pegging its currency to the dollar in 2005). As a result, IMF researchers found that flexible exchange rates were something of a shock absorber, reducing vulnerability to sudden, severe depreciations in such crises. Furthermore, many emerging market banks have significant reserves, which can reduce exchange rate volatility and stimulate growth as well.

Case study: Chile vs. Portugal

Ultimately, the best argument for leaving behind the term “emerging markets” may arise from this simple infographic from the Financial Times. It compares and contrasts two nations: Chile, ostensibly an emerging market (but one with its own booming economy, especially where it concerns startups) and Portugal, supposedly a developed nation (and one on the rebound from the 2008 Recession).

Even with Portugal’s recovery in mind, this tale of two nations is lopsided–in favor of Chile. The Latin American nation’s GDP is slightly less than twice as much as Portugal, and while average purchasing power parity (c. 2014) is higher in Portugal than Chile, every other indicator is not: Chile has a lower percentage of debt and a smaller net fiscal balance.

In other words, emerging market and developed market paradigm isn’t necessarily a good way to view nations. By most indicators, in fact, Chile is doing far better than Portugal.

Conclusion: Rethink “emerging” markets, but understand the limitations

In the end, this 2008 article from the University of Pennsylvania’s Wharton Business School says it best: emerging markets cover too wide a swath of economies (from prosperous ones like China and South Korea to nations like Poland and Indonesia), and it’s past time that we reconsider how we define such markets. As the article points out, the divide isn’t nearly as linear as we think–nor is there a magic switch that can immediately flip an economy from emerging to developed.

Lastly, it’s important to note that emerging markets do continue to face their own problems. For instance, like other such nations, India wrestles with a litany of problems, from underdeveloped infrastructure to pollution. All the same, the difference between emerging markets and their “developed” counterparts may be a difference of political will: India, at least, is willing to face its problems head-on and devise solutions, even as “advanced” economies encounter political dysfunction–and the ensuing self-neglect.

2017-06-19T15:49:08+00:00 June 19th, 2017|Blog, China, Emerging Markets, Global Markets|0 Comments

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