An Overview of Emerging Markets for 2014

Big Question Looming Over the Next Couple of Years (See Calvo’s Article in the Economist)

An emerging market has some characteristics of a developed market but is not yet a developed market.

It may be a nation with social or business activity in the process of rapid growth and industrialization.

-- Wiki

Individual investors can invest in emerging markets:

-- To pick single stocks they can buy ADRs (American Depository Receipts - stocks of foreign companies that trade on US stock exchanges)

-- For a general portfolio they can buy exchange traded funds (ETFs hold basket of stocks focused on a country or index).

“Starting in the year 2003, an underappreciated turning point in the course of the world, this good fortune suddenly spread to virtually all emerging nations, a class that can be defined a number of different ways but here broadly means countries with a per capita income of less than $ 25,000.” --- Ruchir Sharma, Breakout Nations

Performance of Some Emerging Markets

The general conclusion we can make is that most of the EMs are now growing much slower. Is this an issue of conditional convergence ? What will happen if the

US Fed begins to raise short term interest rates?

EM Stock Market Index

Individual chapters on China, India, Brazil, Russia, Mexico, Turkey, and South Africa,...as well as Central Europe, Southeast Asia, and elsewhere

Mr. Sharma has two important and general points to make.

First, the period of 2003-2007, in which there was incredible growth throughout the emerging world, is gone. It was an unusual period not likely to be repeated.

Second, we must no longer think of these economies as homogeneous groupings, as perhaps we did before. In order to predict which economies will do well in the future, we must look at each country on a case by case basis. Some of these countries will prove to be solid and will break out from the slower growing pack. Those are the breakout nations, but there is no single formula for the breakout. Instead there is only a long list of ingredients that will make the breakout likely

http://emergingmarketsblog.wordpress.com/2012/05/20/searching-for-breakout-nations-in-a-sea-of-emerging-markets/

Nice Summary (Unscientific) of Sharma’s book by David Gates – an analyst

Sharma states that there is no “magic formula” for growth...many factors come together to produce the outcome...

--- free markets in money and people--- large saving that is productively employed--- a banking system that makes good investments--- strong property rights and a firm respect for the rule of law--- low and stable fiscal and trade deficits (or surpluses) --- a low and stable rate of inflation --- open environment for investment by foreigners--- better roads, feed the children, provide a good education

Some Salient Facts Drawn from Sharma’s Book

-- Capital inflows to EMs grew 92% (2000-2005) and 478% (2005 – 2010)-- Strong & widespread EM growth began in 2003-- 2007 185 countries had positive growth, 114 grew faster than 5%-- Russia went from $1500 to $13,000 per capita income (2003 – 2012) -- 1980 only 16 countries held inflation below 5%, by 2006 103 countries did it. -- 1970s $1 debt produced $1 GDP, 1980s & 1990s $3 debt produced $1 GDP, 2000 – 2010 $5 debt needed to produce $1 GDP (This is a bogus argument)-- Out of 180 countries only 1/3 can grow at 5% for one decade only 1/4 can grow at 5% for two decades only 1/10 can grow at 5% for three decades only 6 countries grew at 5% for four decades only 2 countries grew at 5% for five decades (Taiwan and SK) -- New Normal for Growth US 2-2.5%, Eurozone & Japan 1-1.5%, EMs 3-4%, China 6-7%-- EMs very different: You must consider their macro variables, and then “kick the tires”

Beyond Sharma...in the Lecture 1 pdf we previously considered the issue of rules (Taylor) versus discretion (Krugman) in

economic policy

I also discussed the important concepts of control of debt (Reinhart and Rogoff) and

inclusive versus extractive industries (Acemoglu and Robinson) and how these

affect policy

Finally there are the dilemmas of short run versus long run in monetary, fiscal, and

regulatory policies.