2b submitted emerging markets topic review

7/30/2019 2b Submitted Emerging Markets Topic Review

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Emerging markets are nations with social or business activity in the process of rapid growth &

industrialization. China & India economies are considered to be the largest.(S.Jain,2006)

The world is focused on emerging markets. The liberalization,

growth, and globalization of these still-nascent economies have made them tremendous sources of interest,

opportunity, and anxiety over the past twenty years.(Khanna & Palepu,2010)

Emerging market fund capital reached in the first quarter of 2011 US $ 121 billion.

The seven largest emerging economies based on GDP are: China, Brazil, Russia, India, Mexico, Indonesia

& Turkey. (Press Trust of India, 2011)

The term emerging markets is widely used, when reading a list of emerging markets or countries we find

that there is a great diversity of these economies. One way would be to describe emerging markets as

simply "all those countries not considered developed". Developed here meaning essentially the major

European countries plus USA, Canada, Japan, Australia and New Zealand. This is a rather negative and

not particularly useful approach however and would include all the countries.(world bank)

A more useful way in defining emerging markets, will be setting some criteria, considering them to be the

standards & some sort of measurements , the major ones are:

1-Level of income.

2-Growth rate.

3-Stage of development.

4- Maturity & instability.



1-Level of Income:

The World Bank uses Gross Domestic Product (GDP) per head as a measure to classify countries as

follows:

Classification GDP per head USD

Low < 755

Lower Middle 755 < 2995

Upper Middle 2995 < 9265

High >= 9265

World Bank Classifications

Source – World Bank.

2-Growth Rate:

One of the reasons emerging markets are considered to be attractive is having a high rate of GDP growth

like the Asian tigers.

3- Stage of development:

Factors to be considered are:

The degree of openness in the economy.

The size of the economy.

The state of the financial market.



There are some countries that are doing very well in these criteria but are still considered emerging

markets such as Hong Kong & Singapore. We need to consider that many emerging markets lack stability

either economic or political or facing considerable uncertainty.

Considering the previously mentioned points the best definition for emerging markets would be those

countries which have started to grow but have yet to reach a mature stage of development and/or where

there is significant potential for economic or political instability. (world bank)

4-Maturity & instability:

The key considerations are maturity & instability. Maturity will be defined using the first three criteria

(level of income, growth rate& stage of development) in order to provide a floor which would rule out

the poorest countries with few prospects as well as a ceiling for being classified as an emerging market.

According to The Economist Intelligence Unit, the political instability index, there are 15 indicators, 12

for underlying & 3 for economic distress index.

I) Underlying vulnerability:

1. Inequality:

Measured by using Gini coefficient.

0 if less than 40.

1 if from 40 to 50.

2 if higher than 50. (World bank,2008).

2. State history:

Measured based on the independence date.

0 if before 1990.

1 if between 1900 & 1950.

2 if after 1950. (CIA, Fact book).



3. Corruption :

According to economist intelligence unit ratings:

0 for low.

1 for moderate .

2 for high. ( Alesina Alberto et al,2003).

4. Ethnic fragmentation:

Ethnic fractionalization index (0 to 100 scale)

0 if lower than 30%.

1 if 30 to 50%.

2 if higher than 50%. ( Alesina Alberto et al,2003).

5. Trust in institutions:

It represents the percentage of the population that trusts the parliament.

0 if more than 50%.

1 if 30-50%.

2 if less than 30%. ( world values survey).

6. Status of minorities:

Represents the economic or political discrimination against minorities.

0 if low or no discrimination.

1 if significant discrimination.

2 if extreme discrimination.

7. History of political instability:

Events of political instability, as recorded by political instability task force

0 if no recorded episodes.

1 if one major episode.

2 if two or more episodes. (PITF database).



8. Proclivity to labor unrest:

Risk of labor unrest

0 if low.

1 if moderate.

2 if high. (Economist Intelligence Unit, risk briefing).

9. Level of social provision. ( Economist Intelligence Unit & World bank, 2008).

10. A country’s neighborhood. (Economist Intelligence Unit)

11. Regime type. (Economist Intelligence Unit)

12. Regime type & factionalism.

II- Economic distress:

1. Growth in incomes ( Economist Intelligence Unit).

2. Unemployment:

Unemployment rate, % (Economist Intelligence Unit).

3. Level of income per head measured by GDP per head at PPP, based on the assumption that

richer countries can easily withstand economic distress

0 if > 12,000 US$.

1 if between 3,000 & 12,000 US$.

2 if < 3,000 US$>

Measuring the stage of development of financial market is more subjective as well as the instability ,

these two factors explain the reason for which Hong Kong & Singapore are still classified as emerging

markets, according to international standards, they both have small , non deep financial markets &

vulnerable to external events.

Three countries will be discussed as examples from three different continents, different cultures, the

countries are:

- Turkey.



- South Africa.

- Chile.

Will be discussed consequently, by applying all the criteria on each country:

Turkey:

1- Level of income:

Year GDP per capita US $

2007 9246

2008 10,298

2009 8554

2010 10,050

2011 10,498

(World Bank)

2- Growth rate:

It’s a major factor for the determination of the attractiveness of the emerging market, below is a graph

representing the Turkish GDP growth rate.




The Turkish economy for the mean time is an open economy .

Turkey has gradually opened up its markets through economic reforms by reducing

government controls on foreign trade and investment and the privatization of publicly owned

industries, and the liberalization of many sectors to private and foreign participation has

continued amid political debate The public debt to GDP ratio, while well below its levels

during the recession of 2001, reached 46% in 2010 Q3. The GDP growth rate from 2002 to

2007 averaged 7%, which made Turkey one of the fastest growing economies in the world

during that period. However, growth slowed to 1% in 2008, and in 2009 the Turkish economy

was affected by the global financial crisis , with a recession of 5%. The economy was

estimated to have returned to 8% growth in 2010.(Turkey, The world factbook,CIA)

Turkey's economy is becoming more dependent on industry in major cities, mostly

concentrated in the western provinces of the country, and less on agriculture. However,

traditional agriculture is still a major pillar of the Turkish economy. In 2010, the agricultural

sector accounted for 9% of GDP, while the industrial sector accounted for 26% and the

services sector 65%..(Turkey, The world factbook,CIA)



After years of low levels of foreign direct investment (FDI), Turkey succeeded in attracting

$22 billion in FDI in 2007 and is expected to attract a higher figure in following years. A

series of large privatizations, the stability fostered by the start of Turkey's EU accession

negotiations, strong and stable growth, and structural changes in the banking, retail, and

telecommunications sectors have all contributed to a rise in foreign investment. In 2012, Fitch

Group upgraded Turkey's credit rating to investment grade after an 18 year

gap.(Reuters,2012)

4-Maturity &instability:

Turkey is in the 55th rank.

The base is comparison to 2007 score which was 5.7.

Underlying vulnerability 7.5

Economic distress 6.0

Index score 6.8

It increased 1.1 since 2007 indicating high risk,(The Economist Intelligence unit,2012).

South Africa:

1-Level of income:

Level of income GDP per Capita US $

2007 5930

2008 5613

2009 5738

2010 7272

2011 8070

(World Bank)



2- Growth rate:

Below is a graph showing South Africa growth rate.


South Africa has a mixed economy with a high rate of poverty and low GDP per capita.

Unemployment is high and South Africa is ranked in the top 10 countries in the world for income

inequality, (Human development report, UNDP,2008).

World Bank research shows that South Africa has one of the widest gaps between per capita GNP

versus its Human Development Index ranking,(World bank,2011).

After 1994 government policy brought down inflation, stabilized public finances, and some foreign

capital was attracted, however growth was still subpar. From 2004 onward economic growth

picked up significantly; both employment and capital formation increased, (OECD,2008)



4- Maturity & stability:

South Africa is in the 39th

rank.

The base of comparison is 2007 score, which was 4.0.

Underlying vulnerability 7.1

Economic distress 7.0

Index score 7.0

It increased 3.0 since 2007, indicating high risk(The Economist intelligence unit,2012).

Chile

1- Level of income:

Year GDP per capita US $

2007 10,406

2008 10,6952009 10,179

2010 12,640

2011 14,394

(World Bank)

2-Growth Rate:



Below is a graph showing Chile growth rate.



3-Stage of development:

One of South America’s most stable & prosperous nations, (BBC,2009).

Chileans below the poverty line dropped from 45.1% in 1987 to 11% in 2009.

Inflation didn’t exceed 5% since 1998, it was 3.2% in 2006.

Chilean Peso’s rapid appreciation against US$ helped dampen inflation,( Library of Congress).

Wages has risen faster than inflation due to high productivity, resulted in boosting national

living standards.

Unemployment was 7.8% in 2006 and continued to fall in 2007, with an average of 6.8%.

High domestic savings & investment rates helped pushing Chile’s economy to average growth

rate of 8% during the 1990’s .

The domestic investment contributes to an estimated total domestic saving rate of 21% of

GDP, (Chilean pension system).

4- Maturity & instability:

Chile is in the 117th

rank.

The base of comparison is the score of 2007, which was 4.1.

Underlying vulnerability 4.2.

Economic distress 6.0.

Index score 5.1.

It increased 1.0 since 2007, indicating moderate risk.

Eventually being among the emerging markets is an indirect sign for the economic growth for undeveloped

countries. Political stability is a key factor for the economic activity in any country, Major determinants are

savings & domestic investments (Chile case), as well as foreign direct investment (FDI), with the levels of

productivity, which all contributes to the growth of GDP per capita,PPP, boosting the domestic living



standard , decreasing the inflation & enhancing the domestic currency value compared to US$ & other

currencies.



References

"Emerging Economies and the Transformation of International Business" By Subhash Chandra

Jain. Edward Elgar Publishing, 2006 p.384.

“Emerging Giants, Competing at Home: How Emerging Market-Based Companies Can Build

Competitive Advantage at Home,” By Tarun Khanna and Krishna G. Palepu, Harvard Business

Press, 2010.

Press Trust of India / New Delhi, URL: http://www.business-standard.com/india/news/brics-is-

passe-time-now-for-%5C3g%5C-citi/126725/on (2011).

The world bank, GDP Per Capita. URL: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD .

World Bank, World Development Indicators 2008 ; Economist Intelligence Unit estimates.

Alesina Alberto et al, "Fractionalization", NBER Working Paper 9411, 2003.

The Euro, Latino, Africa and Asia Barometer polls; World Values Survey.

Political Instability Task Force Database (PITF).

Chilean pension system annual reports.

Political Instability Index: Vulnerability to social and political unrest, 2009.URL:

http://viewswire.eiu.com/index.asp?layout=VWArticleVW3&article_id=874361472

http://www.business-standard.com/india/news/brics-is-passe-time-now-for-%5C3g%5C-citi/126725/on



http://data.worldbank.org/indicator/NY.GDP.PCAP.CD











Social unrest, URL:

http://viewswire.eiu.com/site_info.asp?info_name=social_unrest_table&page=noads.

Economic Assessment of South Africa 2008: Achieving Accelerated and Shared Growth for

South Africa. URL:

http://www.oecd.org/southafrica/economicassessmentofsouthafrica2008achievingacceleratedands

haredgrowthforsouthafrica.htm

"Bureau of Western Hemisphere Affairs, Background Note: Chile". United States Department of

State. 16 December 2011.

http://viewswire.eiu.com/site_info.asp?info_name=social_unrest_table&page=noads


http://www.oecd.org/southafrica/economicassessmentofsouthafrica2008achievingacceleratedandsharedgrowthforsouthafrica.htm



http://www.state.gov/outofdate/bgn/chile/192190.htm

http://en.wikipedia.org/wiki/United_States_Department_of_State




http://www.state.gov/outofdate/bgn/chile/192190.htm




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