Globalist Paper

Emerging Markets: The End of an Artificial Category?

Are emerging markets the new leaders of economic growth?


  • The global recession has knocked the wind out of some of the foundational myths of investing.
  • In 2009, China became Brazil
  • Development aid and financing development are no longer the sole prerogative of Westerners.
  • Ten years ago, emerging markets were still a more-or-less exotic sub-group for thrill-seeking Western investors.
  • Within the OECD itself, several emerging countries are already members including, Mexico, South Korea, Turkey and Poland.

Today more than ever, there is no homogenous category of emerging market. In some cases, notably China and India, it would be more fitting to speak of re-emerging markets, given that until the mid-19th century, these two Asian giants were the two leading powers in terms of world GDP, according to economic historian Angus Maddison.

The fact remains, however, that the decade of the 2000s will have witnessed the rising power of emerging markets on the international stage. From this perspective, the 2008 world crisis will have propelled this transition.

An inflection point was in fact reached in 2008. According to the annual BP Statistical Review of World Energy, for the first time in history, energy consumption in non-OECD countries outstripped that of OECD countries.

The asset class of emerging market countries is no longer homogenous. While ten years ago it was still a more-or-less exotic sub-group for thrill-seeking Western investors, it has now become the “norm,” as the managers of Western funds themselves now recognize. The relevance of classic categories of “OECD countries,” “emerging countries” or even “developing countries” may all fast be fading.

Within the OECD itself, several emerging countries are already members (Mexico, South Korea, Turkey and Poland). The list should grow even further with the enlargement process decided in 2007, notably to encompass Chile and Israel, for example.

What we are witnessing therefore is a two-fold movement. First, emerging countries are becoming increasingly important sources of liquidity and investment. Second, emerging countries are increasingly on the radar when it comes to global institutions making their investments.

Over the years, European and American economies have become dependent on Russian raw materials, Indian labor, Brazilian agriculture or Chinese money. With exchange reserves now in excess of $2,200 billion, China has become the world‘s leading financier, acquiring huge numbers of American treasury bonds.

In turn, in becoming investors in other countries, Brazilian, Indian and Chinese companies will now have to face the same difficulties as their European, Japanese or North American counterparts. Development aid and financing development are no longer the sole prerogative of Westerners.

For example, China, as well as India, Saudi Arabia and Brazil, are now all increasingly involved in Africa and have to face new duties and responsibilities.

Emerging countries now trade more between each other than with developed countries. Thus in 2009, China became Brazil‘s leading customer, purchasing more than 15% of all Brazilian exports, ahead of the United States (almost 11%).

In 2009, indeed, the largest attempted acquisition on the African continent was neither from the United States nor Europe, but from India‘s Bharti Airtel, which attempted to merge with the South African company NTM in a deal worth in excess of $20 billion. Africans themselves, be they Moroccan or Nigerian banks, South African or Egyptian investors, are also investing throughout the continent.

Today, it seems safe to say that the global recession has knocked the wind out of some of the foundational myths of investing. Specifically, the notion whereby OECD markets were supposedly “low risk, low return” and emerging markets were “high risk, high return.”

Investing in the United States has proven extremely foolhardy and costly. Inversely, investing in Brazil or India has proven to be relatively much more profitable and less risky.

What we are witnessing is a recasting and rethinking of models and assumptions on global asset allocation. Indicative of a broader trend, many North American university endowments are repositioning their long-term investment portfolios after taking heavy losses in the global crisis.

At Harvard, as North American stock is being reduced, emerging market investments are being doubled, from less than 5% in 1995 to more than 11% in 2010. The Yale University endowment has taken similar steps, allocating 5% of its total capital to emerging markets.

In terms of foreign direct investment (FDI), multinationals from India, Brazil and China have become important investors on the global level, acquiring assets as much in OECD countries as in emerging countries.

In 2008, under the combined effect of a collapse in FDI towards OECD countries and the rising power of new emergent multinationals, FDI towards emerging countries reached a record 43% of all global FDI. FDI flows towards emerging markets also grew by 11% over the preceding year, while that towards developed countries contracted by more than one-third.

Emerging markets represent more than 80% of the world‘s population. The vast majority of mineral wealth is in their soil. As the past years have shown and the coming will doubtlessly confirm, pockets of growth are now firmly implanted in these countries.

The new contours of the global economy are being made and unmade before our eyes. Our generation will see this transition accelerate. Far from being a concern, this should be a cause for celebration. After all, the West has never ceased preaching that globalization was good and would prove a benefit to all.

Today the winners have Asian and Latin American accents. We should be pleased with this new world. We should hope that this emergence will be happy and motivate us to continue — to paraphrase Karl Popper — our search for a better world.

In this world, polyphony will become the new world music. Let us just hope that this new concert of nations can play in harmony — and without false notes.

This feature has been adapted from the authors’s working paper for the OECD Emerging Markets Network, Emerging Markets: An Expanding World, published in November 2009.

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