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The Potential of Emerging Economies

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 Abstract

Some countries have valuable domestic productions such as Germany, Japan, the United States, Canada or France among others. But there is another group of countries that are representative and are called emerging economies. This group of countries are those that grow more than the average but that their level of nominal and per capita internal production does not reach that of the developed countries. Although they are not considered developed countries, they are important countries given the size of their market, and their progress in economic and social matters. Examples of these are countries such as India and Brazil. That is why, for the world economy to grow in general, it is important that the emerging countries do well.

 


 

Just as there are countries that largely determine the behavior of most of the world’s economies such as the United States and China there is another group of economies that are important because of their growth potential, such as emerging economies. Emerging markets are countries that have made steady progress towards the development and growth of developed countries as can be seen in some indicators of social development, capital markets and clear laws and regulations on transactions. Emerging markets are not as advanced as developed countries in economic and social indicators, but they maintain more developed economies and legal structures than other countries that are lagging in terms of development.

Emerging market countries generally do not have the levels of efficiency in the production of goods and services that developing countries have mainly. Another difference is the regulatory framework of the markets that also explain some of these inefficiencies since the legal framework in some countries is not well established so there is some distrust on the part of investors when they are going to invest in a country of this group.

But the positive aspect of the emerging countries is that because of this progress faster than the developed countries, the returns on investments are in most cases higher. This faster growth is because there is a greater field of improvement in these economies because in many cases there are nascent industries or markets that have not yet been fully developed, making it easier for these countries to grow faster than developed countries when the inefficiencies are solved.

Something that is always linked to the rates of return on investments is the risk that investments face. These risks are linked to political instability, problems or delays with the local infrastructure, the volatility of the local currency or liquidity problems which represents a risk for the investments since when there is little liquidity in a market it is difficult to get returns from the investments due to the little demand.

A problem to identify countries that are classified as emerging is that there is no unanimity in the classifications since some banks have identified certain countries as emerging while there the international monetary fund has another list of countries which makes it difficult to know which are the countries in this category to follow them up. The countries most agents consider as emerging are Brazil, Chile, China, Colombia, Hungary, Indonesia, India, Malaysia, Mexico, Peru, Russia, South Africa, Thailand, and Turkey.

As mentioned in the article China and its economic predominance China has grown more than the other emerging countries so it is expected that China will soon enter the group of developed countries due to the surprising rates to which it has been growing in the last decades. Even with the change of economic model China will continue to grow at high rates and will continue to achieve social achievements. Each analyst agent has the authority to enter the level of emerging markets to any country, as well as to lower their rating to countries on the border.

The main databases that analyze emerging markets consider annually how is the environment to do business in each country and show the positive and negative aspects in the main areas in terms of infrastructure and logistics. In recent years since the global recession of 2007, there has been great volatility which has led some developed countries to see their rating downgraded as Greece, a country that has had major economic problems in the last decade.

Emerging markets, although they are sensitive to the low growth of powers and trading partners such as the United States, China, Japan, and some European countries, also have attractive and large markets for investors, which means that emerging countries are also considered engines. of the world economy.

The indexes that measure the countries that should be in the emerging category measure:

  • Size of the market and the growth rate: This is a sample of the domestic production of a country, the stability of its financial institutions and the size of its population.
  • Market accessibility: Regulation of business, market risk, security problems, how has foreign investment behaved in recent years. How safe it is to do business in that country.
  • Market connectivity: Infrastructure in ports, roads, efficiency in customs procedures. If a country does not have good roads it will be more expensive, and it will take longer to transport goods from one place to another.

 

As mentioned earlier, the last few years have been years of low growth for emerging countries due to the global situation where raw materials saw their price fall, which affected the income of some emerging countries. But this low growth is general and has spread to most countries, which is explained by such a globalized economy where if there is a group of countries that stop growing or enter recession like Brazil they generate a problem in countries that are business partners as they stop consuming and ends up affecting the exports of several countries.

Until 2016, growth has been stagnating in emerging countries and some of the reasons for this are the slowdown in China which affects the price of raw materials, the instability of oil prices and the symptoms of an economy weakened in the United States, where a business cycle is observed to be terminated. Some analysts see China as one of the leaders of this group so if this country stops growing at the rates it was used to, it will generate a big impact on emerging countries’ indicators.

The other two important countries in the emerging countries are the United Arab Emirates and India which had the highest growth in 2015 and has had several reforms to improve business rules and has a market of great potential due to its size. As for Latin America in the last decade, it has offered opportunities to investors thanks to good rates of growth and political and social stability.

Since 2016, Brazil, which was among the five most important countries in emerging markets, stopped being due to the recession in which it started generated by corruption factors and reductions in the prices of raw materials. But the problems of corruption are a widespread problem throughout the region which added to the crisis of commodity prices since 2014, poverty and mismanagement of the economy have caused high growth rates that had at the beginning of the century no longer the same.

Another country that is important among the emerging countries is Mexico, a country that has managed to stand out above most of the countries in Latin America thanks to its large amount of exports and an attractive exchange rate that encourages exports even more. Mexico has a developed manufacturing sector that supplies the United States market. In addition to its manufacturing sector, it has other developed industries that are competitive thanks to low production costs where labor is almost as competitive in terms of costs to Chinese labor. Thanks to the development of its industries, Mexico has managed to develop a good infrastructure network such as railroads that allow transporting the merchandise without problems and in a short time.

Thanks to these advances in emerging markets, the global situation has changed, and the poverty rate has been greatly reduced, but a large percentage of the population still lives in poverty. It is important that emerging countries manage to follow this path of growth and progress so that the global economy advances at good rates and manages to reduce some problems such as poverty. Emerging economies are called to lead global economic growth in the coming years, but not only depends on them with an economy as globalized as we have now, because if countries like the United States and China stop growing or the emerging countries faces to Recessions, they will not be able to grow at their potential rates.

But emerging economies have everything to follow their good path and continue to grow at good rates, developing their institutions and advancing in legal aspects since their societies are established under laws that are fulfilled, the level of wealth and consumption has been raised, investment has increased in recent years, in most of the years of the last decade its economic growth is going at an excellent pace. In addition, emerging countries have higher rates of growth often give better returns on investment than other countries, but we must also be cautious because these rates of return involve greater risks than other risks that developed countries may have as political risks.

Although emerging markets are countries that grow more than the average, they have some difficulties in managing their own expansion. In some countries, policies have been erroneous to encourage the population to increase their savings rate. In terms of demographics in emerging market countries, there is a big difference with developed countries. In emerging countries, the population is younger than in the developed countries and has been growing at high rates, which in a few years, will mean that these countries will provide labor to more countries and avoid some problems when the population ages as large pension liabilities.

In the following charts you can see the population pyramids of the group of developed countries of the G7 (Canada, France, Germany, Great Britain, Italy, Japan and the United States) and countries leaders among the emerging that are green in the second graph that were carried out by a study of the BBVA Bank in the year 2013.

Graph 33. (2013, October 24). Emerging Trends in Developing Countries. Retrieved December 1, 2017, from https://www.slideshare.net/BBVAResearch/emerging-trends-in-developing-countries

Graph 34. (2017, September 20). Emerging and growth-leading economies. Retrieved December 1, 2017, from https://en.wikipedia.org/wiki/Emerging_and_growth-leading_economies

Graph 35. (2017, September 20). Emerging and growth-leading economies. Retrieved December 1, 2017, from https://en.wikipedia.org/wiki/Emerging_and_growth-leading_economies

A problem that arises with demographic explosions is the rise of inequality in the middle and lower classes. To prevent this inequality from rising when economies grow, the quality of life of the lower classes should grow at the same rate as the economy does. As previously mentioned, the economic development of the emerging countries has reduced poverty within its population, but the same has not happened with the rates of inequality which at best have remained stable.

The challenge for governments so that growth does not stagnate is to create a richer middle class that can consume more and that this could be one of the most important components in domestic production. Also, if the middle class grows, they will also use the financial sector of a country more, which will generate another engine for growth. That is why it is not good to have high rates of inequality in emerging countries because this can generate growth in the short term, but it will be a big problem in the long term.

The advantage of the emerging countries is that they start from a low base of middle and low class so that wealth can grow in great magnitude given the field of great improvement that exists in these economies. But it is not enough to encourage domestic consumption. Emerging countries should attract foreign investment to finance local projects and there should be more liquidity in the economy, which favors confidence indicators in the economy.

To attract investment, countries must open their doors to companies from all countries, establishing transparent property rights and opening capital markets to foreign investors. If the financial market adopts international standards, it will generate confidence among investors and the country’s risk premium will be reduced by making local investments more profitable because the financing costs will be reduced.

Although the population is young in emerging countries and can be the workforce used by other countries, it is important that there exist incentives in the countries to retain their skilled labor and thus benefit from these local workers. If countries have problems of employability, workers will look for other countries to work in and, in some cases, with better wages than if they decided to stay in their country of origin. So, governments must worry about creating jobs that require qualified people, which sounds logical, but it is difficult to adopt due to the immediate need of some countries to create jobs regardless of the qualifications of their workers.

In conclusion, the countries of emerging economies have a competitive advantage and it is the wide field of improvement that they have in their main indicators such as employability, inequality, foreign investment, industrial development among others, which attracts capital from all over the world thanks to their generous returns where investors expect economies to grow steadily and significantly in the coming years.

Many multinationals have been in these economies recognizing the potential of these markets that have a large size as in Brazil, China, India, and Mexico. In addition, they take advantage of some advantages such as cheaper labor than in developed countries, in addition to other factors such as natural resources that provide inputs for some industries.

 ©Forex.Academy

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