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Emerging Markets

The phrase “emerging markets” has two distinct connotations. First, it means new and emerging foreign export markets for U.S. companies. The U.S. Commerce Department’s International Trade Administration (ITA) uses the phrase in this sense—pointing at markets where U.S. companies might find additional sales. Second, the phrase acts as an abbreviation in investment circles and refers to groups of nations, regions of the world, and investment strategies which specialize in buying and selling the stock or debt instruments of “emerging markets.”

The same countries are often referred to in either context, although U.S. trade promoters sometimes include countries that would not meet the definition of an emerging market as used by Wall Street investors.

Depending on the particular viewpoint of the individual or institution providing the definition, emerging markets are just a few leading countries or include more than 40 countries on all continents. Frequently mentioned emerging markets are China and India in Asia; Argentina, Brazil, and Chile in the Americas; the former Communist European countries and Russia in Europe; Turkey in the Middle East; and Egypt in Africa. An important leading subgroup with the catchy acronym of “the BRICs” includes Brazil, Russia, India, and China— thus the largest of the emerging markets. By common consensus, the emerging market in the mid-2000s was China—as in the 1970s it had been Japan.

The defining features of emerging markets include at least the following factors. The markets are actively growing under governmental policies that favor a capitaliststyle economy. Governments are predictably stable but not necessarily democratic. Substantial future growth is guaranteed because their internal resources and infrastructure still remain unexploited and undeveloped.

They have a large, growing, and prosperous middle class; in China, for instance, the size of this class is equivalent to the total population of the U.S.; in India this class is only slightly smaller. The countries have either abandoned or are in the process of abandoning state control and ownership of major sectors. They have transparent and modern financial systems. They have a skilled but modestly compensated labor force.

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The Global Context

Emerging markets may be seen as a global natural phenomenon in which waves of economic development lift different countries in sequence to a higher level. The “economic miracle” of the German economy after World War II marked Germany’s recovery from the destruction of Allied bombing with the help of aid and the inflow of foreign investment; Germany lead the recovery of Europe; Japan’s rise—and the rise of the Asian “Tigers” (Hong Kong, Taiwan, Singapore, and South Korea)—followed in turn. Latin America developed by exploitation of its agriculture and oil resources.

The collapse of Communism led to liberalization of East European economies and the emergence of new market economies there, initially in Poland, then elsewhere. This process indirectly stimulated Chinese liberalization of its economy (if not its politics) producing the rise of China to economic eminence in the 2000s. The process, however, has not been without its ups and downs. As Gill Tudor documented in her book, Rollercoaster: The Incredible Story of the Emerging Markets, a Mexican monetary crisis beginning in 1994 produced a global crisis of confidence in emerging markets which spread throughout Latin America and from there eventually touched all of the emerging markets. But the emerging markets recovered from the panic in part through the intervention of the “mature markets” which adjusted their investments and refinanced emerging market debt.

The Local Consequences

In the context of major international trade agreements, like the North American Free Trade Agreement (NAFTA), emerging markets are presented to the U.S.

public as opportunities for export—and therefore a vibrant domestic economy. However, the globalization of modern, technological economies is an adjustment process that has local costs for mature economies which may be higher than benefits achieved.

Emerging markets are “emerging” because they offer advantages, usually lower cost labor, no longer available in mature economies. Thus they induce a flow of capital from developed to developing theaters of economic activity.

As Jeffrey E. Garten pointed out, writing in Newsweek International, “emerging markets have moved from the periphery of the global economy to the center.

They have become integral to international production, trade, and finance… . [O]ver the last 10 years the emerging-market share of international trade has increased from about 27 percent to more than 33 percent.” This translates into a strong flow of direct investment (in plant and equipment) to these markets. Garten, citing IMF figures: “Between 1994 and 1996 net private direct investment … was 1.5 times greater than investment in stocks and bonds… . Now it is eight times greater.

Between 1994 and 2005, net foreign direct investment increased 92 percent, whereas net investment in stocks and bonds actually decreased slightly.” He cites a 2005 General Electric announcement that 60 percent of GE’s revenue growth would come from China, India, Russia, and Brazil over the next decade. He points out that WalMart, which entered the Brazilian market in 1995, had started 259 stores in that country. Wal-Mart had also opened 51 stores in China since 1996 and was planning dozens more in 2006. These examples, multiplied by the hundreds, indicate growing investments made elsewhere, not in the U.S.

Meanwhile, as Robert Samuelson pointed out (in Newsweek), the U.S. economy, seemingly unaware of the broad trends, has been on a shopping spree. “From 1996 to 2005,” Samuelson wrote, citing Sara Johnson of Global Insight, “the United States generated almost 45 percent of global growth in consumer spending… That dwarfs the U.S. share of the world economy, [which is] about 20 percent.” Not surprisingly the U.S. trade deficit moved from $191 billion in 1996 to $784 billion in 2005.

Half Full Or Half Empty

Emerging markets off U.S. shores represent a growing standard of living across the globe. Locally they cause the unwelcome phenomenon of factory closings and layoffs due to outsourcing. Globalists see the glass half full and foresee eventual equilibrium as emerging markets mature.

Samuelson put it as follows: “As people [overseas] grow richer, their wants multiply. Industry looks more to meeting their demands than generating ever-larger trade surpluses. The expansion of consumer credit (which is still tiny compared with the United States) encourages the process.” Meanwhile American consumers, hurt by high interest rates and very high debts will wean themselves of their consumption addiction. And the gap will close. Pessimists see the glass half empty and advocate, instead, curbing uncontrolled globalization in favor of managed trade that will protect the jobs of U.S. workers.