Developing Economies

Developing nations are those with low, lower middle or upper middle incomes. Common characteristics of developing countries are low levels of living characterized by low income, inequality, poor health and inadequate education.

Low levels of living are not only in relation to their counterparts in rich nations, but also in relation to the small elite class within their own countries. These low levels of living are manifested quantitatively and qualitatively in the following forms

-a general sense of malaise and hopelessness. -a low gdp (gross domestic product) Many people in developing nations fight a constant battle against malnutrition, disease and ill health. In least developed countries life expectancy in 1998 averaged only 48 years, 68 years among developing countries and 75 in developed countries.

In the 1990's in Asia and Africa, over 60% of the population barely met minimum caloric requirements needed to maintain adequate health.

Malnutrition, waterborne disease, and aids also afflict these countries while low literacy levels require significant school development

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Emerging Markets

An emerging market is a country that has some characteristics of a developed market, but does not meet standards to be a developed market.^[1] This includes countries that may become developed markets in the future or were in the past.^[2] The term "frontier market" is used for developing countries with slower economies than "emerging".^[3][4] The economies of China and India are considered to be the largest.^[5] According to The Economist, many people find the term outdated, but no new term has gained traction.^[6]Emerging market hedge fund capital reached a record new level in the first quarter of 2011 of $121 billion.^[7] The four largest emerging and developing economies by either nominal or PPP-adjusted GDP are the BRIC countries (Brazil, Russia, India and China). The next five largest markets are South Korea (though, considered a developed market), Mexico, Indonesia, Turkey, and Saudi Arabia. Iran is also considered an emerging market.^[8]

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Emerging markets - opportunity or threat?

1: Are Emerging Markets an Opportunity or a Threat?

The most obvious debate on this topic would be the potential benefits and problems involved with targeting emerging markets:

Opportunities
Strong Economic Growth
Rising consumer incomes and growing ‘middle-classes’
Opportunities for joint ventures with local businesses

Threats
Culture/varying customer needs
Difficult to protect ideas from competition due to inadequate laws
Infrastructure could be poor, making distribution and marketing difficult
 
Students can build strong evaluative arguments, using examples of successes and failures in emerging markets and then considering the factors that success might depend upon. A good compare and contrast here would be Coca Cola (who recently announced their largest areas of sales growth to be India (+20%), China (+9%) and (+4%) from Brazil); against businesses like Kellogg’s who failed to attract enough sales in India due to cultural and lifestyle differences.

2: What makes emerging markets attractive? Push and Pull factors

Another interesting evaluation point could be to consider the motives behind a strategy of targeting emerging markets. These can be grouped under headings of ‘push’ and ‘pull’ factors:

Push Factors

Reasons for wanting to grow outside of domestic country:
• Restrictive and costly legislation
• Weak UK/US/EU economies
• High levels of competitive rivalry
• High wage costs and operating costs in UK/US/EU

Pull Factors

Factors that make emerging markets attractive:
• Strong economic growth
• Large and growing populations
• Growing middle classes
• Less competitive pressure
• Cheaper wages and operating costs

Students here can evaluate the relative influence on businesses of the ‘push’ and ‘pull’ factors, and which of the factors are likely to be the most significant behind a strategy of targeting emerging markets. Nestle for example have recently announced that their sales in their main US and European markets have grown just 3.1% versus 13% growth in emerging markets.

3. Will the BRIC ‘Bubble’ Burst?

Students might also consider a number of recent reports suggesting that growth is slowing in emerging markets, which might mean the BRIC ‘goldmine’ could have limited appeal in the future. It was announced this month that China’s GDP had grown at a rate of 8.1% for the first quarter of 2012, which is the slowest pace of growth for almost three years. The Indian economy only grew by 6.9% in the financial year to 31 March 2012, also the slowest pace in three years. Students could here question if businesses are likely to be investing as much in these markets with such economic uncertainty, backed up by a recent news release on Tesco’s website:

“With the slowing economy in China, a combination of persistently high inflation and wage cost pressures are making the environment for mainstream retailers much more challenging. This background has led us to take a more cautious stance on the market, at least for the time being. We had already taken a more measured approach to substantial new capital commitments to freehold shopping centres and we have also decided to hold back on the pace of new hypermarket development this year – with plans to open 16 stores, instead of stepping up the pace of expansion as we had intended”

Emerging markets is a very topical area of the BUSS4 specification, and considering evaluation from a number of angles with a number of compare and contrast examples, should be useful for preparation for essays on this subject.

Business & Emerging Markets from tutor2u

Characteristics of emerging markets

Definition: Emerging markets, also known as emerging economies or developing countries, are nations that are investing in more productive capacity. They are moving away from their traditional economies that have relied on agriculture and the export of raw materials. Leaders of developing countries want to create a better quality of life for their people. Therefore, they are rapidly industrializing and adopting a free market or mixed economy.

Emerging markets are important because they drive growth in the global economy. Furthermore, their financial systems have become more sophisticated thanks to the 1997 currency crisis.

5 Characteristics of Emerging Markets

Emerging markets have five agreed upon characteristics. First, they have a lower-than-average per capita income. The World Bank defines developing countries as those with either low or lower middle per capita income of less than $4,035. (See World Bank list)

Low income is the first important criteria because this provides an incentive for the second characteristic, rapid growth. To remain in power, and to help their people, leaders of emerging markets are willing to undertake the rapid change to a more industrialized economy. In 2015, the economic growth of most developed countries, such as the United States, Germany, the United Kingdom and Japan, was between less than 3 percent.

Growth in Egypt, Turkey, and the United Arab Emirates was 4 percent or more. China and India both saw their economies grow around 7 percent.

Rapid social change leads to the third characteristics, high volatility. That can come from three factors: natural disasters, external price shocks, and domestic policy instability.

Traditional economies that are traditionally reliant on agriculture are especially vulnerable to disasters such as earthquakes in Haiti, tsunamis in Thailand, or droughts in Sudan). But these disasters can lay the groundwork for additional commercial development as it did in Thailand.

Emerging markets are more susceptible to volatile currency swings, such as the dollar, and commodities, such as oil or food. That's because they don't have enough power to influence these movements. For example, when the U.S. subsidized corn ethanol production in 2008, it caused oil and food prices to skyrocket. That caused food riots in many emerging market countries.

When leaders of emerging markets undertake the changes needed for industrialization, many sectors of the population suffer, such as farmers who lose their land. Over time, this could lead to social unrest, rebellion and regime change. Investors could lose all if industries become nationalized, or the government defaults on its debt.

This growth requires a lot of investment capital.

But the capital markets are less mature in these countries than the developed markets. That's the fourth characteristic. They simply don't have a solid track record of foreign direct investment. It's often difficult to get information on companies listed on their stock markets. It may not be easy to sell debt, such as corporate bonds, on the secondary market. All these components raise the risk. That also means there's greater reward for investors willing to do the ground-level research. (Source: "The Difference Between Developed, Emerging and Frontier Markets, NASDAQ, May 11, 2012.)

If successful, the rapid growth can also lead to the fifth characteristics, higher-than-average return for investors. That's because many of these countries focus on an export-driven strategy. They don't have the demand at home, so they produce lower-cost consumer goods and commodities for developed markets. The companies that fuel this growth will profit more, which translates into higher stock prices for investors. It also means a higher return on bonds, which cost more to cover the additional risk of emerging market companies. (Source: Ashoka Mody, "What Is an Emerging Market?" IMF Working Paper,  September 2004,)

It is this quality that makes emerging markets attractive to investors. Not all emerging markets are set up to become breakout nations, and, therefore, good investments. They must also have little debt, a growing labor market, and a government that isn't corrupt.

Emerging Markets List

The MSCI Emerging Market Index lists 23 countries. They are Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Qatar, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, and United Arab Emirates. This index tracks the market capitalization of every company listed on the countries' stock markets.

Other sources also list another eight countries. They are Argentina, Hong Kong, Jordan, Kuwait, Saudi Arabia, Singapore, and Vietnam. (Source: Tarun Khanna, "How Companies Break Into Emerging Markets," Harvard Business School, )

The main emerging market powerhouses are China and India. Together, these two countries are home to 40 percent of the world's labor force and population. Their combined economic output ($27.8 trillion) is greater than that of either the European Union ($19.18 trillion) or the United States ($18.0 trillion). Therefore, any discussion of emerging markets must keep in mind the powerful influence of these two super-giants. (Source: CIA World Factbook, 2015 statistics.)

Investing in Emerging Markets

There many ways to take advantage of the high growth rate and opportunities in emerging markets. The best is to pick an emerging market fund. Many funds either follow or try to outperform the MSCI Index. That saves you time, so you don't have to research foreign companies and economic policies. It reduces risk by diversifying your investments into a basket of emerging markets, instead of just one.

Not all emerging markets are equally good investments. Since the 2008 financial crisis, some countries took advantage of rising commodities prices to grow their economies. They didn't invest in infrastructure, but instead spent the extra revenue on subsidies and creating government jobs. As a result, their economies grew quickly, their people bought a lot of imported goods, and inflation soon became a problem. These countries included Brazil, Hungary, Malaysia, Russia, South Africa, Turkey, and Vietnam.

Since their residents didn't save, there wasn't a lot of local money for banks to lend to help businesses grow. Therefore, the governments attracted foreign direct investment by keeping interest rates low. Although this helped increase inflation, it was worth it in return for significant economic growth.

In 2013 commodity prices fell. These governments either had to cut back on subsidies, or increase their debt to foreigners. As the debt-to-GDP ratio increased, foreign investments decreased. In 2014, currency traders also began selling their holdings. As currency values fell, it created a panic, leading to mass sell-offs of currencies and investments.

Others invested revenue in infrastructure and education for their workforce. The people saved, so there was plenty of local currency to fund new businesses. When the crisis occurred in 2014, they were ready. These countries are China, Colombia, Czech Republic, Indonesia, Korea, Peru, Poland, Sri Lanka, South Korea, and Taiwan. For more, see Breakout Nations.

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How solid are the BRICs?

The BRIC grouping is shorthand for four countries – Brazil, Russia, India and China – and the BRIC acronym has become popular to describe the growing power and influence of emerging markets in the global economy. The BRICs already have a bigger share of world trade than the USA and China is on the verge of surpassing Japan as the second largest economy in the world.

All four BRIC countries have seen rapid economic growth in recent years with the greatest attention being paid to the super-charged expansion of the Chinese economy. Jim O’Neill from Goldman Sachs is attributed for having created the BRIC idea and in the eight years since he first coined the idea, the increase in the size of these four countries has far exceeded their initial projections

How solid are the BRIC nations?

What happened to the BRIC economies?

Remember the Brics - Brazil, Russia, India, China and South Africa, the nations that were set to reshape the world economy?

Two of them, China and Russia have the potential to cause some serious and rather unwelcome reshaping in the near future.

In China's case it's the risk that an economic slowdown could turn into something more damaging.

With Russia, it's the possible economic fallout from the conflict in Ukraine.

Four of these five countries - South Africa is the exception - were identified in 2001 as large and fast-growing economies that would have increasingly influential global roles in the future.

Today it's China and Russia that are potentially the most troubling for the rest of the world in the near term.

China's story is one that we would inevitably have had to face sooner or later. Indeed you might say it is remarkable that it hasn't come sooner.

The Brics and how they perform matter for the rest of the world

China has recorded extraordinary rates of economic growth for a very long time - an average of 10% a year for three decades.

But there are weaknesses. It's based on very high rates of investment, currently running at 48% of national income or GDP.

When it's so high there's always a danger that many projects will turn out to be wasteful or unprofitable, undermining the finances of the investors themselves and anybody who has lent them money.

Only a handful of countries have higher rates of investment, none of them with much to teach China. They are Bhutan, Equatorial Guinea, Mongolia and Mozambique.

The other element in China's rapid growth is exports.

That is not so reliable these days as the rest of the world struggles to recover convincingly from the financial crisis.

Chinese transition

What the Chinese government wants to do is move towards economic growth that's a bit slower and driven more by selling goods and services to Chinese consumers.

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The Bric Countries

The BRIC are both the fastest growing and largest emerging markets economies. They account for almost three billion people, or just under half of the total population of the world. In recent times, the BRIC have also contributed to the majority of world GDP growth.

According to various economists projections, it is only a matter of time before China becomes the biggest economy in the world - sometime between 2030 and 2050 seems the consensus. In fact, Goldman Sachs believe that by 2050 these will be the most important economies, relegating the US to fifth place

By 2020, all of the BRIC should be in the top 10 largest economies of the world. The undisputed heavyweight, though, will be China, also the largest the creditor in the world.

Apart from their growth characteristics, the BRIC countries frankly have little in common. They are primarily an investment category now, although there may some political and economic alliances that develop from that grouping. If they do, it is likely to be temporary - once China has assumed its rightful place, it may have no need for these alliances. A G2 of China and the US may be more important for it unless the 2050 predictions do come true.

In 2008, the BRIC countries had a summit and analysts believed that they were seeking to 'convert their growing economic clout into political power'.

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When giants slow down

THIS year will be the first in which emerging markets account for more than half of world GDP on the basis of purchasing power, according to the International Monetary Fund (IMF). In 1990 they accounted for less than a third of a much smaller total. From 2003 to 2011 the share of world output provided by the emerging economies grew at more than a percentage point a year (see chart 1). The remarkably rapid growth the world has seen in these two decades marks the biggest economic transformation in modern history. Its like will probably never be seen again.

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