Commentary on Political Economy

Thursday 27 July 2023


Time to retire the ‘emer­ging mar­kets’ label

Clump­ing the devel­op­ing world together obscures risks and oppor­tun­it­ies

Humans have an innate desire to sort and cat­egor­ise the world around them. The eco­nom­ist Ant­oine van Agt­mael is no excep­tion. In 1981 at the World Bank, he coined the phrase “emer­ging mar­kets” as a more aspir­a­tional altern­at­ive to the term “third world”. The label has since become syn­onym­ous with a hotch­potch of fast-grow­ing nations con­sidered to be ris­kier invest­ment pro­spects than “developed mar­kets”. While it may have been a suc­cess­ful rebrand, for eco­nom­ists and investors the catchall term has become unhelp­ful.

Emer­ging mar­kets, which account for the bulk of the world’s pop­u­la­tion, are not a homo­gen­eous group. Rather, they con­sist of dynamic and highly diverse coun­tries at dif­fer­ent stages of devel­op­ment — and their com­pos­i­tion has changed vastly since the term became pop­u­lar. For instance, the break­neck growth of China and India makes them par­tic­u­lar out­liers when com­pared to fel­low EMs. Recent shocks have also under­scored the eco­nomic diversity across EMs. On the policy front, cent­ral banks in emer­ging Europe and Latin Amer­ica were par­tic­u­larly aggress­ive in rais­ing interest rates to get ahead of infla­tion in the after­math of the pan­demic and the war in Ukraine. Mean­while, some EMs have prudently built up for­eign cur­rency reserves and issued more home cur­rency debt mak­ing them less sus­cept­ible to crisis dynam­ics.

Volat­ile com­mod­ity mar­kets have also dis­tin­guished net energy export­ers from import­ers and those with crit­ical reserves. And ten­sions between the west and China are hav­ing dif­fer­ing eco­nomic impacts too, depend­ing on geo­graphy and dip­lo­matic rela­tions. Indeed, though trade lib­er­al­isa­tion since the 1990s helped most EMs to take off, the next phase of glob­al­isa­tion, which looks to be punc­tu­ated by rising pro­tec­tion­ism and friend-shor­ing, is set to have more dif­fer­en­ti­ated impacts.

This vari­ation makes the EM moniker increas­ingly unfit for mac­roe­co­nomic and invest­ment ana­lysis. The broad­brush label can obscure risks and oppor­tun­it­ies. For instance, the rising nar­rat­ive around EMs’ eco­nomic resi­li­ence — with fewer than anti­cip­ated debt defaults in the after­math of the pan­demic — risks play­ing down the pock­ets of vul­ner­ab­il­ity that still exist. Tur­key has a dearth of FX reserves, private sec­tor debt ser­vi­cing costs in Brazil and China are con­cern­ing, and Tunisia and Pakistan are on the brink.

Fin­an­cial mar­kets also still rely on the EM-DM dicho­tomy or other regional group­ings. But investors will want expos­ure to coun­tries likely to bene­fit from new trends, includ­ing the scramble for crit­ical min­er­als and “China plus one” sup­ply chain strategies. Indeed, dis­ag­greg­at­ing EM bonds, equit­ies and altern­at­ive assets, such as infra­struc­ture projects, on a coun­try or them­atic basis could help investors to unlock higher returns and enable devel­op­ing coun­tries to obtain more cap­ital. For that, access to reli­able coun­try-level data will be import­ant.

There have been numer­ous attempts to pop­ular­ise other group­ings. The Brics nations — Brazil, Rus­sia, India, China and South Africa — are per­haps the most fam­ous. Then there are “emer­ging and growth lead­ing eco­nom­ies”, or Eagles. Few have proved use­ful, given large eco­nomic dif­fer­ences in terms of trade, growth and fin­an­cial open­ness. Defin­i­tions also vary. Invest­ment indices focus on mar­ket access met­rics, while eco­nomic bod­ies prefer mac­roe­co­nomic thresholds.

The devel­op­ing world does not fall neatly into a single cat­egory. And, in a global eco­nomy hit by mul­tiple crises and geo­pol­it­ical upheaval, there are even greater upsides for eco­nom­ists and investors that can dif­fer­en­ti­ate between them. Per­haps it is time to retire the EM label alto­gether.

No comments:

Post a Comment