(This is the first of a series of articles which tend to explain the role of markets and governments in initiating, promoting and sustaining growth in  emerging economies)

Phenomenon of Emerging Economies

The term emerging economies has an enigmatic ring to it. This commonly exchanged term has numerous interpretations and multiple outlooks depending largely on the kind of context and the individual’s exposure to the economic reality of these aspiring nations. There are some who use it to describe the economies which are experiencing a burst of growth bringing it into the established territory of the developed and highly industrialized countries. There are others who use this term to club those nations which have embarked on the part of industrialization and have high economic growth co-existing with high economic inequality. There are still others who use it in an off-hand way to club those countries who are considered to be upstarts and yet show promising (and to some unnerving) growth in various areas. Probably the most apt and insightful definition of the term can be obtained from political scientist Ian Bremmer who defines an emerging market as “a country where politics matters at least as much as economics to the markets”.

When the definition of the term itself is so fuzzy, we can hardly expect the economic or other parameters used to define an emerging economy to be crystal clear. However, what can be clearly interpreted is the necessity to evaluate a nation not only on pure economic terms but also on political and social parameters such as governance mechanisms, political stability, human development index, health and wellness factors etc. The close connection between all these parameters makes an emerging economy so interesting. The dynamicity of the situation and the environment due to the interaction and inter-dependency of these factors makes an emerging economy both a growth engine as well as a risky proposition to invest on.

The buzz around emerging economies is mainly due to the exciting growth which has been visible in the past decade in these countries coupled with the greater pliability of the policies encouraging foreign investments in various sectors of the country. Countries such as China, Brazil, India, Russia, Indonesia and Egypt have been keenly observed for their economic performance, political stability, business environment and policy level decision governing future growth directions.

Background

The eyes of the developed economies of US and Western Europe were trained on these economies as a viable market to invest in for higher growth. Along with this, economists looked with fascination at these rapidly industrializing and developing economies for better understanding the development of markets, the formation of consumer groups, the development of new buyer behaviour, the adoption curve for new technology and the direction taken by national policies to boost and sometimes contain this growth.

Emerging markets mainly come into existence when traditionally followed policies of economic activity are altered. Either a socialist/state driven economy which has fallen behind in terms of progress looks beyond regulated markets towards market driven economy or the socio-political scenario in that country requires huge capital investments to lift it out of depression and bring it on the path of progress and growth. These are simplistic reductions of complex situations but they serve to bring out the essential background that most emerging economies are in a transitory phase of economy which has left it in a state where further progress would require a complete turn-about of policies and a greater reliance on market driven economy. This implies that such countries would essentially either approach a highly cautious wait-and-watch policy of measured steps towards market driven economies or they would be favouring bold open market policies which would revolutionize the economic activity. The pace of these developments and the relaxing of regulations and policies favouring open trade is the main crux of the issue. The liberalization policies adopted by India as well as the state-capitalism followed by China serve as examples of the crossroads on which emerging economies alter their paths and achieve high growth rates. However, even in these cases, there are protectionist measures taken along with an overall cautious approach taken to ensure the long term independent growth of the economy. The favouring of open market policies also sometimes stems from the inability of these countries in managing large global debts towards developmental policies. The mounting of these debts along with the burden of trade deficits leads such countries towards the alternative of open markets with greater possibilities of foreign investments and increased growth fuelled by investors who are willing to partner in the development of the nation. For attracting such investors, the business climate needs to be conducive and attractive to these players. This nudges the countries into adopting more free market oriented policies to smoothen the entry of foreign investors and boost the development of the nation fostering future growth.

Unique Aspects of Emerging Economies

Through the study of these emerging economies, there are some inherent differences seen in them viz-a-viz the developed economies. Firstly, these emerging countries were regional leaders who were at the forefront of the industrialization and development curve in their neighbourhood. This made them political heavy weights who determined the course of the region through their own policies. Secondly, these countries were on the cusp of change and this made them a highly dynamic market having widely varying and fractious groups of consumers driving growth. Their socio-political situation was poised to change every few years making their policy changes very vital as well as very nimble. Thirdly, these countries were experiencing very high growth rates which are not seen in any of the developed countries due to there being a saturation of their market demand. This high growth could be due to a low-base effect or could be due to the presence of vast resources, human and natural, available and waiting to be tapped. Fourthly, these countries enjoyed increasing clout at the global stage as future leaders who were having the muscle to shape global policies and reduce the clout of the developed nations.

Constraints and Challenges

Emerging economies face numerous constraints due to the inherent changing dynamics of the socio-political scenario. Since countries like India and China have just emerged from the shadows of a socialist government controlled structure, their initial steps on the path of market driven and private industry fuelled economic growth are bound to be fraught with great perils and stiff challenges. The primary challenge is a change of ideology from the restrictive and controlled atmosphere of state controlled economies to market forces driven economic activity. Since all the emerging economies have embraced some form of free market psychology, hence there is a need for them to emerge from their past tendency towards governmental control and restrictions. This change is bound to be tough for countries since they need to recalibrate their government policy and rethink of strategies which favour open markets. Allied to this is the change necessary in mindsets of the policy makers and government regulatory bodies that need to take a step backwards and hand over control to market forces. Excess government intervention can pose a risk of derailing any serious attempt at industrial growth and can peg the country back in the race. Secondly, there is the factor of corruption which can emerge as a major force due to the sudden boom in growth areas and investment opportunities. Since there are numerous policy changes in the hands of the government, the spectres of favouritism and embezzlement raise their ugly heads and result in a unfavourable environment to do business. This can impact the overall growth prospects of a country and can also lead to stunted growth only in the high profit sectors leaving aside the development of crucial areas of the economy. Thirdly, there is the role that these emerging economies play in the overall development of the entire region. These countries such as China, India, Brazil play a crucial role in the rise to prominence of the entire subcontinent in world politics and world policy decisions. This added burden or responsibility governs their every move and this brings out an added dimension of constraints on their actions and the policies and stands they make both internally and externally while charting their growth stories.

Socio-Political Structure

The social backgrounds of these countries bear close resemblance to each other. Most of these emerging economies have been very successful and at the pinnacle of growth, trade and commerce in the pre-industrialization era. Then the period of dominance of the mercantilism and colonialism of Western Europe brought these thriving markets to a grinding halt. Through their campaign of economic, social and political subjugation, the European countries pegged back the growth and industriousness of these potential world powers by a few centuries. These countries naturally came out of colonialism with a deep rooted disrespect for capitalism and free market economies. Being at the receiving end of colonial powers following these principles, these countries once freed preferred a state dominated with an intensely regulated economy. The rationale was to vest the power in the hands of the state who would ensure equitable distribution of wealth, development of the nation, emphasis on social empowerment and a balanced growth. However, the state sponsored capitalism or socialism followed in such countries neglected the power of competition in spurring innovation. Due to the initial backwardness of these nations during the 20^th century, they preferred the protectionist approach of raising their tariff walls to prevent foreign goods from destroying the local markets and industries. While this policy was a good start, it could never be a sustainable model due to the stagnation of local demand and the eventual need to find new markets to compete. Hence, policies such as the liberalization of the Indian economy were taken up to eventually spur innovation through increased competition with global industries. As discussed later, these policies were efforts made by the government to proactively step into a higher growth and a more robust economic model.

To be continued. The next article will talk about Role of markets as growth engine.

Nabarun sengupta

MBA Batch of 2012,

IIT Kanpur