In the latest business jargon, they’re emerging markets. But upstart economies have been around for centuries, and have been attracting the attention of global investors for just as long.Emerging markets may be a new term, but the concept is not. More than 200 years ago, the hottest emerging market in the global economy was a fledgling nation called the United States. Investors in the advanced industrial countries of the day, such as Great Britain, were willing to pour tremendous amounts of money into the new world to finance the construction of infrastructure such as railroads and telegraphs.
Today investors’ focus has shifted to Asia – China in particular, with its lure of 1.2 billion consumers – and to Eastern Europe, Latin America and Africa. The strategy is the same: build infrastructure and develop new markets, using know-how and capital that are readily available in other parts of the world.
A market begins to emerge when it has caught the attention of the world’s leading industrialists, bankers and investors. As the word suggests, these are markets that are perceived to be coming out of hiding, opening up and entering the mainstream of the global economy.
In effect, emerging markets are coming out of economic isolation – self-imposed or otherwise – that has shielded them from global competition and opportunities. Emerging markets account for a rapidly growing share of the international flow of capital, goods and information.
Many countries previously referred to as developing countries are now regarded as emerging economies. But not all developing countries are emerging markets, and neither are all countries that used to belong to the former communist countries of Asia and Eastern Europe.
Who decides if a country is emerging or not? In one sense, we all do.
If we as consumers start buying products made in a country that we never used to buy from, or if we as investors put money into a mutual fund that has invested in that country, then we are helping those countries emerge. We may not be the first to have discovered what these countries – ranging from Colombia to the Czech Republic and from Egypt to Indonesia – have to offer. Corporations, banks and fund managers have paved the way.
Morgan Stanley Capital International, a financial services company, has developed a series of indexes that fund managers use to guide global investments and against which their performances are measured. One index used by Morgan Stanley is income per capita; in an emerging market, it is generally low. Of the 28 countries regarded as emerging markets, only two, Taiwan and Israel, have average incomes exceeding 9,385 U.S. dollars.
Otherwise, countries are classified as emerging mainly because there is a general perception in the investment community that they are emerging. In this context, perception is reality.
However, one can also argue that markets emerge because of historical and political transformations – events that change not only perceptions but also realities. These include China’s “open door” policy starting in 1978, the fall of the Berlin Wall in 1989, the economic liberalization policies launched in India in 1990, and Brazil’s break with hyperinflation in 1994.
The effects of these events were spectacular. In Asia, for example, the average annual flow of foreign direct investment quintupled between the late 1980s and the late 1990s, going from just under USD 16 billion to slightly more than USD 80 billion, according to the United Nations Conference on Trade and Development. In the same period, Asia’s average annual share of such investment worldwide doubled from 9 percent to 18 percent.
The process of emergence can be a slow and cumbersome one, though. One century ago, Argentina and Brazil were among the world’s leading emerging markets. They still are.
In the past 30 years or so, few emerging markets have managed to transform themselves into mature economies. Those who have come closest are South Korea, Taiwan, Hong Kong and Singapore. South Korea recently joined the Organization for Economic Cooperation and Development (OECD), considered a “rich club” among nations. Yet despite the economic and industrial strength of these Asian tigers, business magazines such as The Economist still classify them as emerging rather than mature economies.
The process of emergence also is rife with potholes, as was made evident when what started out as the Asian crisis became a wide-scale international emergency.
The 1990s investment boom in emerging markets was driven in part by multinational corporations that entered new markets or returned to old ones, building factories and distribution networks. Another force was a cascade of bank loans and portfolio investments.
The investment boom reached a peak in 1996, when net private capital flows to emerging markets reached a value of USD 212 billion. Shortly thereafter, sudden financial setbacks in several of the leading emerging economies sharply eroded investor confidence.
The Asian crisis started in Thailand, when the Bank of Thailand was forced to cut the baht’s ties to the U.S. dollar on June 2, 1997. This unleashed a financial crisis that soon engulfed Indonesia, Malaysia and South Korea, and subsequently sent shock waves to Russia and Brazil. A few months after Bangkok went bust, emerging markets were being referred to as “submerging markets” as capital fled and currencies plunged.
Since then, however, currencies and stock markets have rebounded and exports have boomed. Foreign direct investment reached record levels in 1999. Like the sun peeking back out after a storm, emerging markets have come out again after the crisis, and appear to be here to stay.
a business journalist and author based in Thailand