“What emerging realities do you see in light of the emerging economies?”
Skipping the definitions, I’ll jump straight to the Emerging Realities (ER) that seem to be taking shape in light of recent developments in the emerging markets:
ER1 (GLOBALISATION): Globalisation used to mean, by and large, that business expanded from developed to emerging economies. Now
it flows in both directions, and increasingly also from one developing economy to another. One sign of the times is the growing number of companies from emerging markets that appear in the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the so-called BRIC economies of Brazil, Russia, India and China, up from 31 in 2003, and is set to rise rapidly. On current trends, emerging-market companies will account for one-third of the Fortune list within ten years.
Skipping the definitions, I’ll jump straight to the Emerging Realities (ER) that seem to be taking shape in light of recent developments in the emerging markets:
ER1 (GLOBALISATION): Globalisation used to mean, by and large, that business expanded from developed to emerging economies. Now
it flows in both directions, and increasingly also from one developing economy to another. One sign of the times is the growing number of companies from emerging markets that appear in the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the so-called BRIC economies of Brazil, Russia, India and China, up from 31 in 2003, and is set to rise rapidly. On current trends, emerging-market companies will account for one-third of the Fortune list within ten years. ER2 (CONSUMER MARKETS): The sheer size of the consumer markets now opening up in emerging economies, especially in India and China, and their rapid growth rates, will shift the balance of business activity far more than the earlier rise of less populous economies such as Japan and South Korea. A shift in the balance of business would directly translate into shift in investment and production patterns that are closer to the emerging market structure
ER3 (LEAPFROG THEORY): Emerging markets skipped a step when they went from agrarian societies, directly to service led economies. While this may be a good thing for them as they were able to readily learn from the mistakes that the developed nations committed and thus implemented the best practices known at present, it might also become their bane. When countries like the USA grew, they first made roads, hospitals, schools etc., before they went on to investment banking and telecommunication. In countries like India, we have ‘leapfrogged’ directly to services. We today have Airtel & Vodafone towers in villages that do not have half-decent roads. While this jump is leading to a huge boom in growth rates, this growth wouldn’t be sustainable if the fundamentals are not put in place. The govt. at these countries should pump the money being generated due to this boom into basic sectors like health & education to ensure that even if we do not have western support tomorrow, we are fundamentally strong enough to maintain our growth trajectory.
ER4 (INFLATIONARY PRESSURES): High oil and food prices are creating inflationary pressures in many emerging countries that had enjoyed years of stable, low prices along with extraordinary economic growth. Thus these economies may no longer enjoy the huge cost advantage that was their major, and sometimes only, claim to fame.
ER5 (RESOURCE UTILISATION): The side-effects of rapid development, such as pollution and water shortages, also need to be tackled. After a long period in which globalization has been all about labor productivity, the business challenge everywhere, and especially in emerging markets, will increasingly be to raise resource productivity—using fuel, raw materials and water more efficiently. This becomes increasingly important for emerging economies as they face a resource crunch at a time when their energy needs are peaking. On the other hand, the current developed nations had plenty of everything when they grew.
ER6 (NEW PRODUCTS & PROCESSES): When we agree that profitable markets are no longer in the developed countries, but in the emerging economies now, a few things become evident. One is those new consumers, who often demand products at far lower prices and often in more basic forms or smaller sizes than their developed-country counterparts. Emerging-market firms with experience of serving these consumers think they are better placed to devise such products than their developed-world competitors. The same logic may apply to innovations in business models that allow goods and services to be delivered in fundamentally different ways and at much lower cost. But there are also things which companies in emerging markets may lack vis-à-vis their ‘emerged’ counterparts. The greatest of these may be a deep well of managerial experience, which emerging-market firms often lack.
ER7 (ECONOMIC DECOUPLING): One fear is that American jobs will disappear overseas. This is despite plenty of academic evidence that open economies generally do better than closed ones, that in America in particular many more and generally better jobs have been created in recent years than have been destroyed, and that the number of jobs lost to outsourcing is tiny compared with those wiped out by technological innovation . Lately a new fear has been adding to the protectionist sentiment, turning even some usually enthusiastic global capitalists into protectionists. Could the rise of the new champions reflect the advance of bad forms of capitalism at the expense of good forms? Well if it does, then a serious question will face emerging economies like India, >50% of whose GDP is contributed by services (of which a major chunk is BPO+KPO). The question is whether these nations are over dependant on external demand? Can these nations successfully decouple themselves from the developed nations and still have enough internal demand to sustain their double digit growth rates? A lot of emerging economies are taking cognizance of this question and the trend emerging is that of promotion of internal demand.
ER8 (FINANCIAL DECOUPLING): Are the emerging economies too FDI dependant? Are our own markets strong enough to survive without foreign inflows? Questions that had been raised in the past but gathered much more steam after the current debacle in the financial world. The emerging economies have been the worst hit as the foreign investors pulled out in an attempt to reduce the risk in their portfolio. There are serious concerns over whether these emerging economies have enough steam on their own to ride through this storm, or are they too ‘coupled’ with developed nations and will go down with them.
ER9 (RISE OF STATE CAPITALISM): Sovereign funds are unpopular. Such funds have provided several top Wall Street firms (as well as some of their European rivals) with large injections of cash in the past year—including Citigroup, which received $7.5 billion from the Abu Dhabi Investment Authority (ADIA). That probably saved a few of them from bankruptcy or a Bear Stearns-style forced sale, but it was controversial.
Through corporate acquisitions and the investments of sovereign-wealth funds, the role of the state (often an undemocratic one) in the global economy is rapidly expanding. Given the lamentable history of state intervention in business, this does not bode well. At the very least, the growing role of states that often lack democratic credentials creates a sense that the competition from emerging-economy champions and investors is unfair, and that rich-country firms may lose out to less well-run competitors which enjoy subsidised capital, help from political cronies or privileged access to resource supplies. So there is a real risk that bad capitalism will spread in the coming decades. Yet at the same time this latest, multidirectional phase of globalisation offers enormous potential for business to raise living standards around the world.
ER10 (JUST FACTS): Seven years after Goldman Sachs invented the BRICs acronym, the performance of the emerging stock markets is running well ahead of the bank’s high expectations. Even after recent falls, at the start of this month Brazilian shares
were up by 345% since November 2001, India’s by 390%, Russia’s by 639% and China’s, depending on whether you go by the mainland or the Hong Kong exchange, by 26% or 500%. In 2001 Goldman Sachs had predicted that by the end of the decade the BRIC economies would account for 10% of global GDP at purchasing-power parity (PPP); by 2007 their share was already 14%. The investment bank now expects China’s GDP to surpass America’s before 2030.
ER11 (NOT JUST CHEAP LABOR): No longer are emerging markets just looked at for cheap labor. While it still remains an attraction, but a declining one as wages in emerging markets and transport costs go up. These days, multinational firms are looking for the skills that workers from emerging markets can bring to a job as much as for lower labor costs.
ER12 (WORLD’S A SMALLER PLACE): The rapid spread of mobile telephony among poorer consumers in the emerging markets is one notable trend. Companies from emerging markets are developing expertise in providing low cost solutions to their customers without any compromise on quality. For eg. - AirTel, the Indian market leader, charges what may be the lowest prices in the world—around two cents a minute for nationwide calls—yet is hugely profitable, thanks to an innovative business model in which many of its operations are outsourced to big multinationals such as Ericsson and IBM.
ER13 (FROM DEVELOPING TO DEVELOPING): No longer are developing economies depending on demand generated by just developed ones. They have understood that the new products and processes that they are defining, are much more suited to other emerging economies where the demographics and psychographics match those in their nation. Already, new champions such as AirTel and Desarrolladora Homex, a Mexican builder of low-cost housing, are planning to take their innovative business models and pricing to other emerging markets, betting that they will transfer more easily between developing economies than from developing to developed ones. Homex hopes to serve communities “in highly populated and underserved areas where we believe our replicable business model will be most effective,” says its chief executive, Gerardo de Nicolas.
ER14 (BETTER OUTLOOK FOR ENTREPRENEURS): Admittedly, venture capital is lagging behind other sorts of finance in establishing a presence in emerging markets. Yet almost everywhere in the developing world the outlook for entrepreneurs is far better than it was even five years ago.
ER15 (SHIFT IN BOTH ECONOMIC AND MILITARY POWER CENTERS): Why did the USA chose that peculiar combination of Georgia, Afghanistan, Iran and Pakistan to target? Why does the USA want to befriend India and go to any length to fight for our (nuclear) cause. Well, just mark these countries on a map and see how they form a belt from Russia to China.
The USA has realized that in the near future, it will not remain the sole superpower, military or otherwise. Alternate power centers are developing in China and Russia. This is leading to a strategic shift in the way the USA and UK plan out deployment of their troops. Also, countries where they can’t win by force, they are forging economic ties (India being an example). The effort is to closely monitor the growth of these new ‘Asian’ power centers and respond accordingly.
With the above mentioned emerging realities, also emerge a few serious questions:
Q1 (GOOD CAPITALISM – BAD CAPITALISM): In particular, how will the governments of these emerging economies choose to mix the various models of capitalism. Ominously, the governments of some of the bigger emerging economies—notably Russia and China—seem bent on a mixture of state-led and maybe oligarchic capitalism, rather than the potent blend of big-firm and entrepreneurial capitalism that has served America, Britain and other rich countries so well.
Q2 (SOVEREIGN FUNDS): Should the rich world worry about it? There is no evidence so far that sovereign-wealth funds are trying to wield inappropriate influence in the companies they invest in. One day they might, but until then they probably deserve the benefit of the doubt. The most plausible scenario is that the growth of sovereign-wealth funds, along with other possibly mercantilist forays by emerging-country governments, will simply waste a lot of capital
Q3 (PROTECTIONISM): The rise of protectionist sentiment in developed countries is a serious cause for concern. Capitalism is a dynamic force and can change over time—including from good forms to bad. Just because America, in particular, has long been a force for good capitalism does not mean that it will continue that way.
Q4 (MINDLESS AGRESSION): In its attempt to set up military bases near China, USA went on a mindless rampage against Afghanistan and Iraq. The reason given was flimsy enough to make clear the intentions behind the attacks. Would this be the future? Would the present superpowers panic and go on a wild fighting spree in a vain attempt to kill all competition? Are we at the brink of a world war before we see a new world order emerge?
Reference:
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=423172&story_id=12080735
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=423172&story_id=12080711
http://seekingalpha.com/article/53198-emerging-market-trends-what-s-next
http://www.emergingeconomyreport.com/knowledge-base/
http://www.emergingeconomyreport.com/?page_id=24
http://www.doorsofperception.com/archives/2008/05/emerging_econom.php
http://www.oppapers.com/topics/Leapfrog-Case/0
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=423172&story_id=12080751
ER3 (LEAPFROG THEORY): Emerging markets skipped a step when they went from agrarian societies, directly to service led economies. While this may be a good thing for them as they were able to readily learn from the mistakes that the developed nations committed and thus implemented the best practices known at present, it might also become their bane. When countries like the USA grew, they first made roads, hospitals, schools etc., before they went on to investment banking and telecommunication. In countries like India, we have ‘leapfrogged’ directly to services. We today have Airtel & Vodafone towers in villages that do not have half-decent roads. While this jump is leading to a huge boom in growth rates, this growth wouldn’t be sustainable if the fundamentals are not put in place. The govt. at these countries should pump the money being generated due to this boom into basic sectors like health & education to ensure that even if we do not have western support tomorrow, we are fundamentally strong enough to maintain our growth trajectory.
ER4 (INFLATIONARY PRESSURES): High oil and food prices are creating inflationary pressures in many emerging countries that had enjoyed years of stable, low prices along with extraordinary economic growth. Thus these economies may no longer enjoy the huge cost advantage that was their major, and sometimes only, claim to fame.
ER5 (RESOURCE UTILISATION): The side-effects of rapid development, such as pollution and water shortages, also need to be tackled. After a long period in which globalization has been all about labor productivity, the business challenge everywhere, and especially in emerging markets, will increasingly be to raise resource productivity—using fuel, raw materials and water more efficiently. This becomes increasingly important for emerging economies as they face a resource crunch at a time when their energy needs are peaking. On the other hand, the current developed nations had plenty of everything when they grew.
ER6 (NEW PRODUCTS & PROCESSES): When we agree that profitable markets are no longer in the developed countries, but in the emerging economies now, a few things become evident. One is those new consumers, who often demand products at far lower prices and often in more basic forms or smaller sizes than their developed-country counterparts. Emerging-market firms with experience of serving these consumers think they are better placed to devise such products than their developed-world competitors. The same logic may apply to innovations in business models that allow goods and services to be delivered in fundamentally different ways and at much lower cost. But there are also things which companies in emerging markets may lack vis-à-vis their ‘emerged’ counterparts. The greatest of these may be a deep well of managerial experience, which emerging-market firms often lack.
ER7 (ECONOMIC DECOUPLING): One fear is that American jobs will disappear overseas. This is despite plenty of academic evidence that open economies generally do better than closed ones, that in America in particular many more and generally better jobs have been created in recent years than have been destroyed, and that the number of jobs lost to outsourcing is tiny compared with those wiped out by technological innovation . Lately a new fear has been adding to the protectionist sentiment, turning even some usually enthusiastic global capitalists into protectionists. Could the rise of the new champions reflect the advance of bad forms of capitalism at the expense of good forms? Well if it does, then a serious question will face emerging economies like India, >50% of whose GDP is contributed by services (of which a major chunk is BPO+KPO). The question is whether these nations are over dependant on external demand? Can these nations successfully decouple themselves from the developed nations and still have enough internal demand to sustain their double digit growth rates? A lot of emerging economies are taking cognizance of this question and the trend emerging is that of promotion of internal demand.
ER8 (FINANCIAL DECOUPLING): Are the emerging economies too FDI dependant? Are our own markets strong enough to survive without foreign inflows? Questions that had been raised in the past but gathered much more steam after the current debacle in the financial world. The emerging economies have been the worst hit as the foreign investors pulled out in an attempt to reduce the risk in their portfolio. There are serious concerns over whether these emerging economies have enough steam on their own to ride through this storm, or are they too ‘coupled’ with developed nations and will go down with them.
ER9 (RISE OF STATE CAPITALISM): Sovereign funds are unpopular. Such funds have provided several top Wall Street firms (as well as some of their European rivals) with large injections of cash in the past year—including Citigroup, which received $7.5 billion from the Abu Dhabi Investment Authority (ADIA). That probably saved a few of them from bankruptcy or a Bear Stearns-style forced sale, but it was controversial.
Through corporate acquisitions and the investments of sovereign-wealth funds, the role of the state (often an undemocratic one) in the global economy is rapidly expanding. Given the lamentable history of state intervention in business, this does not bode well. At the very least, the growing role of states that often lack democratic credentials creates a sense that the competition from emerging-economy champions and investors is unfair, and that rich-country firms may lose out to less well-run competitors which enjoy subsidised capital, help from political cronies or privileged access to resource supplies. So there is a real risk that bad capitalism will spread in the coming decades. Yet at the same time this latest, multidirectional phase of globalisation offers enormous potential for business to raise living standards around the world.
ER10 (JUST FACTS): Seven years after Goldman Sachs invented the BRICs acronym, the performance of the emerging stock markets is running well ahead of the bank’s high expectations. Even after recent falls, at the start of this month Brazilian shares
were up by 345% since November 2001, India’s by 390%, Russia’s by 639% and China’s, depending on whether you go by the mainland or the Hong Kong exchange, by 26% or 500%. In 2001 Goldman Sachs had predicted that by the end of the decade the BRIC economies would account for 10% of global GDP at purchasing-power parity (PPP); by 2007 their share was already 14%. The investment bank now expects China’s GDP to surpass America’s before 2030.ER11 (NOT JUST CHEAP LABOR): No longer are emerging markets just looked at for cheap labor. While it still remains an attraction, but a declining one as wages in emerging markets and transport costs go up. These days, multinational firms are looking for the skills that workers from emerging markets can bring to a job as much as for lower labor costs.
ER12 (WORLD’S A SMALLER PLACE): The rapid spread of mobile telephony among poorer consumers in the emerging markets is one notable trend. Companies from emerging markets are developing expertise in providing low cost solutions to their customers without any compromise on quality. For eg. - AirTel, the Indian market leader, charges what may be the lowest prices in the world—around two cents a minute for nationwide calls—yet is hugely profitable, thanks to an innovative business model in which many of its operations are outsourced to big multinationals such as Ericsson and IBM.
ER13 (FROM DEVELOPING TO DEVELOPING): No longer are developing economies depending on demand generated by just developed ones. They have understood that the new products and processes that they are defining, are much more suited to other emerging economies where the demographics and psychographics match those in their nation. Already, new champions such as AirTel and Desarrolladora Homex, a Mexican builder of low-cost housing, are planning to take their innovative business models and pricing to other emerging markets, betting that they will transfer more easily between developing economies than from developing to developed ones. Homex hopes to serve communities “in highly populated and underserved areas where we believe our replicable business model will be most effective,” says its chief executive, Gerardo de Nicolas.
ER14 (BETTER OUTLOOK FOR ENTREPRENEURS): Admittedly, venture capital is lagging behind other sorts of finance in establishing a presence in emerging markets. Yet almost everywhere in the developing world the outlook for entrepreneurs is far better than it was even five years ago.
ER15 (SHIFT IN BOTH ECONOMIC AND MILITARY POWER CENTERS): Why did the USA chose that peculiar combination of Georgia, Afghanistan, Iran and Pakistan to target? Why does the USA want to befriend India and go to any length to fight for our (nuclear) cause. Well, just mark these countries on a map and see how they form a belt from Russia to China.
The USA has realized that in the near future, it will not remain the sole superpower, military or otherwise. Alternate power centers are developing in China and Russia. This is leading to a strategic shift in the way the USA and UK plan out deployment of their troops. Also, countries where they can’t win by force, they are forging economic ties (India being an example). The effort is to closely monitor the growth of these new ‘Asian’ power centers and respond accordingly.
With the above mentioned emerging realities, also emerge a few serious questions:
Q1 (GOOD CAPITALISM – BAD CAPITALISM): In particular, how will the governments of these emerging economies choose to mix the various models of capitalism. Ominously, the governments of some of the bigger emerging economies—notably Russia and China—seem bent on a mixture of state-led and maybe oligarchic capitalism, rather than the potent blend of big-firm and entrepreneurial capitalism that has served America, Britain and other rich countries so well.
Q2 (SOVEREIGN FUNDS): Should the rich world worry about it? There is no evidence so far that sovereign-wealth funds are trying to wield inappropriate influence in the companies they invest in. One day they might, but until then they probably deserve the benefit of the doubt. The most plausible scenario is that the growth of sovereign-wealth funds, along with other possibly mercantilist forays by emerging-country governments, will simply waste a lot of capital
Q3 (PROTECTIONISM): The rise of protectionist sentiment in developed countries is a serious cause for concern. Capitalism is a dynamic force and can change over time—including from good forms to bad. Just because America, in particular, has long been a force for good capitalism does not mean that it will continue that way.
Q4 (MINDLESS AGRESSION): In its attempt to set up military bases near China, USA went on a mindless rampage against Afghanistan and Iraq. The reason given was flimsy enough to make clear the intentions behind the attacks. Would this be the future? Would the present superpowers panic and go on a wild fighting spree in a vain attempt to kill all competition? Are we at the brink of a world war before we see a new world order emerge?
Reference:
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=423172&story_id=12080735
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=423172&story_id=12080711
http://seekingalpha.com/article/53198-emerging-market-trends-what-s-next
http://www.emergingeconomyreport.com/knowledge-base/
http://www.emergingeconomyreport.com/?page_id=24
http://www.doorsofperception.com/archives/2008/05/emerging_econom.php
http://www.oppapers.com/topics/Leapfrog-Case/0
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=423172&story_id=12080751
8 comments:
The best analysis of the lot... though i have just one querry... the leapfrog theory is mainly for India others EEs are still following the A-I-S path.. agri-ind-ser.
Thanks for the compliment. Yes, you are right, India is the most prominent example of the leapfrog theory being applied to globalisation. But I felt it was important to highlight it still as
a) India is a major EE
b) It's a serious case study of a country, which had all the resources to go ASI, took the jump. It illustrates a good example for other to learn from (both pros and cons)
You make some interesting points and it is a nice informational piece. I am intrigued on your assertion that the U.S. has "good capitalism." It's worth a chat over chai in the coming days. Look forward to meeting you soon. Regards, Roberto
Dude,
Amazing stuff man... Right from that SBN class you are still rocking with your insights... Keep blogging man whenever you are free from your P.Com duties... Will add you to my blogroll in Google Reader...
Hey Varun
Thanks a ton for the compliments. As I've stated, Numero Uno forced me to write a blog - something that i'd been procrastinating on for a long time now.
But now that I've started, and with the encouragements of co-bloggers like yourself, I'll sure make an effort to do this blog some justice.
Let's keep the debates alive both here and on your blog...
Sure boss... I will do my best to cover some good topics also... I am mainly a general blogger, covering stuff related to movies, USA and news in particular.
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