competitive.
In the recent past, emerging markets were often characterised by what many considered to be unfair trade policies. While this stigma still persists, the fact that most of the emerging markets discussed in this book have become members of the World Trade Organization (WTO) has created a legal mechanism to redress grievances by members. This has made the trade wars of the past much less frequent between states today.
In a recent McKinsey study of 720 companies around the globe (in both developed markets and emerging markets) data from 2227 separate market segments was analysed. It was found that companies in emerging markets could deploy changes at a faster rate, cater to local markets more efficiently and, above all, were far more effective at innovating. This analysis was not subjective; it was on full display in the bottom line. According to the analysis, emerging markets had overall revenue growth rates of almost 24%, while developed markets had growth rates of less than 11%.
As emerging market nations continue to reduce overall imports and increase exports (and increase reserves), they are well-positioned to avoid the fate of the developed world, where payments for imports require high deficits, generosity or optimism of foreign investors, exports, or foreign earnings repatriated by citizens abroad.
Trade factors
The following factors will be considered when it comes to trade and trade policies.
Share of world exports
An emerging economy’s increasing share of world exports brings it much needed foreign currency, which can pay for valuable imports and support its own currency in case of an external shock. An emerging economy can also insulate itself from external shocks with a diversified basket of exports.
Trade balance (surplus/deficit)
When a country has more exports than imports, it is said to have a trade surplus. On the flip side more imports than exports implies a negative balance of trade and therefore a deficit. While a trade deficit or surplus is not good or bad per se, large deficits are not sustainable in the long run. A prolonged trade deficit essentially makes a country a net debtor and erodes demand for goods produced by domestic industries. Countries that have had a prolonged trade deficit with no plan to fix the situation are looked upon unfavourably.
Trade barriers
Economic research has proven that trade barriers like quotas and import tariffs restrict economic growth. Open trade helps countries diversify their economies, reduce costs, improve productivity and reduce poverty. Countries that take concrete steps to reduce trade barriers and participate in open trade globally are looked upon favourably.
Dependence on exports
Countries like Brazil and Australia have boomed in recent times thanks to commodity exports to China. But their abundant natural resources also hold them hostage to a Chinese slowdown. Countries that are highly commodity or export driven must make efforts to diversify their economies and reduce their exposure to the possibility of a global slowdown.
Reserves-to-import ratio
This ratio is defined as total reserves divided by total imports. The more reserves a country has relative to its imports the better. Once reserves are exhausted a country has to borrow to pay for imports, which would put it in a precarious financial position.
5. Political stability and governance
Political stability (or lack thereof) has been a major factor in the unwillingness of many to invest their capital in emerging markets. When one looks back at some of the social unrest, corruption and conflict that used to plague many of these nations, one can hardly blame investors for their apprehension.
This outsider perception is certainly not lost on the majority of emerging market nations. Having come to realise that political balance sheets are just as important to their nation’s well-being as financial balance sheets, public leaders have placed a great deal of importance on achieving and maintaining political stability.
Another factor helping to promote political stability is the proliferation of 24/7 news media. There are armies of political scientists, analysts and hundreds of organisations watching the developments within these countries. The channels of information, in other words, are much more difficult for a government to muzzle than say the local press, which in the past would often kowtow to political heavyweights.
It should be noted that political stability is not equated to democracy because democracy is not always a good indicator of economic potential. China is clearly an example of a society that is not democratic, while India is. Yet China has consistently achieved higher growth rates. The obvious difference is that China has a controlled society with market access and has been able to channel its resources effectively to increase jobs, exports and industrialisation. India, a vibrant democracy, still has a partially closed economy with limited access and is focused on internal consumption.
There are many examples of dictatorships that have done reasonably well economically and, of course, many democracies that have failed miserably. Indonesia, Philippines, Turkey, Thailand and Argentina all had dictatorships during their recent history and delivered above average economic benefits for their citizens, though they certainly curtailed personal freedoms.
The purpose here is not to pass moral judgment on which political system is ideal, but rather to realise that growth can happen in spite of almost any political system. That said, for trade and business relationships to flourish a minimum set of standards with regard to property rights, legal rights and transparency would be required.
Political stability and governance factors
Political stability and governance will be examined based on the following factors:
Economist Intelligence Unit (EIU) political risk
This metric takes into account a range of political factors that could affect a country’s ability and commitment to service its debt obligation and the potential to cause turbulence in the foreign exchange market. The ratings are measured on a scale of 0 to 100 with higher scores indicating higher levels of risk.
Alliant political and economic ranking
Alliant Insurance Services ranks each country on a 100-point scale with a higher score indicating lower risk. The rating focuses on financial losses arising from the following sources of risk: trade credit, currency inconvertibility and transfer, legal and regulatory risk, sovereign default and government breach of contract, expropriation and creeping expropriation, strikes, riots, and civil commotion, war and civil war, and terrorism.
Freedom from corruption
Freedom from corruption is measured using a scale of 0 to 100, where 100 represents maximum freedom. As this score rises GDP growth and per capita GDP also rises. Corruption reduces economic efficiency and creates insecurity in economic transactions. Countries with a lower level of corruption enjoy extra points of GDP growth.
Regulation freedom
Regulation
