and now are less dependent on exports alone. There are many trade pacts between emerging market countries and developed countries and increasingly there are many trade pacts between emerging market countries themselves. All this is bolstering trade, which is the lifeblood of many of these emerging economies.
Today’s emerging market countries are competing in world markets and many have attained household status. Samsung in Korea now rivals Sony and Apple. Embraer, an aircraft manufacturer from Brazil, is now one of the world’s leading producers of airplanes. And Tata is the new owner of Jaguar and Land Rover. These are just a few examples of companies that were hardly known to the world a few years back, but are now household names thanks to open trade policies.
Consumption and investment
In many emerging market countries there is now a balance between domestic consumption and investment, leading to more sustainable growth.
Better political governance
Many emerging markets want to attract foreign investors. They are eager to open their doors and meet the conditions that foreign investors require, such as better property rights and accurate disclosures. Governance and political stability is still an issue for investors and businesses located in emerging markets, but not nearly as much as it was previously. There is more of an institutional framework today than ever before, aimed at better disclosure, transparency and investor rights. Legal frameworks are now firmly in place and although they are still sometimes bureaucratic and cumbersome, these nations are clearly on the right path, giving investors added confidence that their investments are not at the mercy of bureaucrats or politicians.
More privatisation
Many emerging market countries are on a sustained path of transferring state-owned institutions to private hands. In some cases, progress is slow, but the trends are positive for many countries. This will likely create more competition and higher productivity as well as helping to achieve more transparency and less bureaucracy.
Urbanisation
Urbanisation is the major movement of our times. This is the likely path of countries like China and India, and many other emerging market nations. For example, 57% of China’s population, 70% of India’s population and 73% of Vietnam’s population still reside in rural areas. Compare this to the United States, where roughly 12% of the population resides in rural areas. Industrialised movements are initiated by the mass migration of populations to cities – away from low productivity farm occupations to higher productivity jobs in industry.
The proportion of the annual gross domestic product of the United States generated in agriculture is less than 2%, while in India it is 17% and China it is 11%. The shift away from agriculture to industry is likely to take decades. This in turn will result in higher incomes and higher domestic consumption in countries such as China, India, Indonesia, and others.
Technology and innovation
Technological staples in developed countries are becoming more accessible in emerging market nations, from cell phone penetration to internet usage. This is reshaping industries and the lives of the people who are the beneficiaries of this dramatic change. Whether it’s mobile applications in India that allow farmers to get a better price for their crops or the development of low-cost solar power in Africa, the spread of technology and innovation is having a major impact on the productivity (and profits) of emerging market economies.
Higher savings rate
Most emerging markets have higher savings rates and lower consumption rates – a reversal that is likely to create momentum for growth and cushion financial shocks.
Deeper/broader financial markets
Many emerging markets have expanded financial markets (both for local and private investment) and taken steps to liberalise rules so as to attract foreign capital. Although it will likely take quite some time before most of these emerging markets get to the level of market depth, exposure and disclosure present in more developed markets, the results in the direction of progress are encouraging so far.
Better transparency
In years past many emerging markets were notorious for lack of transparency and absence of proper disclosure. With many of the emerging markets now competing on the world stage there is a definite push towards more transparency and disclosure. In many emerging market countries there are now independent institutions in the mould of the United States’ SEC and Federal Reserve that have a supervisory function and are able to enforce strict rules for both transparency and disclosure.
Reasons to be cautious
1 Political conditions can change quickly. Many emerging market countries are still struggling with political instability.
2 Infrastructure is still grossly inadequate in most emerging market countries, with the exception of China. Many of these counties will require a massive infusion of capital – which is quite scarce in most emerging markets – to rectify this.
3 Corruption continues to be an issue in most emerging markets.
4 Property rights and the rule of law need to be monitored carefully.
5 Hot money can flood into many of these markets only to then exit just as quickly. This leaves long-term investors holding the bag.
Chapter 3: Ten Drivers of Growth in Emerging Markets
There is a healthy debate about what may truly constitute the drivers of growth in any country. For our purposes, the ten drivers outlined in this chapter are used as the framework of the analysis of the short and long-term opportunities and threats in emerging markets. In Part 2 the data for each country is analysed to inform our understanding of that country’s position in each of the ten key areas.
The ten drivers are:
1 Demographics
2 Economic
3 Financial
4 Trade
5 Political stability and governance
6 Business conditions
7 Technology, innovation and infrastructure development
8 Human development
9 Environment
10 Capital markets
1. Demographics
In the simplest terms, demographics are people. Human capital at work is the very lifeblood of emerging nations. When the demographic conditions are right, it can completely transform a nation, resulting in prosperity and well-being for decades to come. Aside from the hard numbers – total population, population growth and average age, to name a few – there are other, less quantitative, factors at play when it comes to demographic advantages. Nations with populations that place a high value on hard work and competitiveness
