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Emerging economies

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• Characteristics of emerging markets – large, populous and growing rapidly.

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Which economies are emerging markets?

• World Investment Prospects to 2011, The Economist Intelligence Unit, 2007

Developed countries United States of America Canada Belgium France Germany Italy Netherlands Spain Sweden United Kingdom

Emerging markets Developing Asia China Hong Kong India Malaysia Singapore South Korea Taiwan Thailand Vietnam

Emerging Markets Latin America Argentina Brazil Chile Colombia Mexico Venezuela

Emerging Markets Eastern Europe and Turkey Azerbaijan Bulgaria Czech Republic Hungary Kazakhstan Poland Romania Russia Slovakia Ukraine Turkey

Emerging Markets Middle East and Africa Algeria Egypt Nigeria Qatar South Africa United Arab Emirates

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BRICS• BRICS _ Brazil, Russia, India, China – coined by Jim O’Neill of Goldman

Sachs in 2001.• For this decade Mr. o’Neill has coined another term - growth markets – • defined as those emerging economies that accounts for more than one

percent of global GDP. • The BRICs qualify along with Indonesia, Mexico, South Korea and Turkey.• What sets them apart is not their size or their growth, but the

combination of the two.• This means that the BRICS will make an outsize contribution to increases

in global GDP.• Between 2011 and 2020 their contribution will be twice that of the G7 as

predicted by Mr. O’Neill.

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• What will be the source of the growth of these economies: The economic convergence of productivity and purchasing power.

• Poor countries grow faster than the rich ones. It is easier to imitate better techniques than it is to invent them.

• At the same time prices and exchange rates tend to rise more quickly in ‘cheap’ countries like India where a dollar’s worth of rupees stretches much further than a dollar in America; until things cost as much as they do in more expensive locations.

• Thanks to both kinds of convergence, the combined GDP of the BRICs might exceed $95 trillion by 2050.

• That is more than 6 times the size of the American economy.

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• Conditions for the rapid growth of a poor country:

• Prevalence of the rule of law• Favorable terms of trade• Inflation and government profligacy remained

in check• Families small, healthy and educated.

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Convergence

• Goldman Sachs takes the BRICs income per person relative to that of America as a proxy for their economic backwardness.

• Bigger the gap, the greater the potential for catch-up growth.

• Countries will differ in how they will exploit the potential. Some absorb know-how from abroad quicker than others.

• Convergence speed will vary even if the distance they had to cover were the same. Depends on the determinants of economic growth. Various indicators are used : openness to trade, corruption, diffusion of mobile phones and so on.

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2007 2008 2009 2010 2011* 2012*

1 USA USA USA USA USA USA

2 Japan Japan Japan China China China

3 China China China Japan Japan Japan

4 Germany Germany Germany Germany Germany Germany

5 UK France France France France France

6 France UK UK UK UK UK

7 Italy Italy Italy Brazil Brazil Brazil

8 Spain Russia Brazil Italy Italy Italy

9 Canada Spain Spain India India India

10 Brazil Brazil India Canada Russia Russia

11 Russia Canada Canada Russia Canada Canada

12 India India Russia Spain Spain Spain

13 Korea Mexico Australia Australia Australia Australia

14 Mexico Australia Mexico Mexico Mexico Korea

15 Australia Korea Korea Korea Korea Mexico

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• China moved past Japan to become the world’s second- largest economy with an annual GDP of just under $ 6 trillion.

• Only the US whose aggregate output was $14.5 trillion in 2010 remains larger than China.

• Brazil passes Spain and Italy to become the 7th largest economy and is fast approaching the UK.

• India and Russia both jumped over Spain to move into 9th and 11th positions respectively.

• In aggregate, the BRICs GDP is over $11.2 trillion or over 75% of that of the US.

• The BRICs continued strength despite weakness in developed world means that they have become the dominant drivers of global growth.

• The BRICs have contributed over 50 percent of global growth (measured in US dollars) over the past 3 years 2008-10 compared with an average of 27 percent in 2000-07.

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PPP exchange rates

• The BRICs position in the global economy looks even more favorable if countries GDP is compared using PPP exchange rates.

• PPP exchange rates adjust for the fact that non-tradable goods tend to be cheaper in developing countries so that the market exchange rates tend to underestimate the true purchasing power of the local currency.

• According to PPP based rankings, China has been the second largest economy in the world since 2001.

• All the BRICs have been in top ten since 1994.

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Low living standards• While all of the BRICs will likely soon be among the ten largest

economies, living standards continue to lag behind the developed world.

• India and China will continue to register among the fastest GDP per capita growth rates in the world. But their low starting base mean that convergence to developed market levels is still a long way off.

• In 2010, the developed market average per capita income was $38,100 in PPP adjusted dollars ($39,500 in US $).

• Russia recorded GDP per capita of $15,900 (US $10,400) just 40% (26%) of developed market average.

• Brazil per capita income was $11,200 (US $10,700) in 2010• China and India lagged behind with GDP per capita $7500 (US $4400)

and $3300 (US $1400) respectively.

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• EMERGING markets” is a useful term precisely because it is imprecise.

• Coined for the convenience of investors looking for somewhere exciting to put their money, it covers a bewildering range of economies with little in common, except that they are not too rich, not too poor and not too closed to foreign capital.

• The invention of “emerging markets” as an asset class required the invention of experts to manage those assets; experts who could discourse confidently about places as far apart as South Korea and South Africa.

• It might seem impossible to say anything coherent about such an eclectic mix of places.

• The key behind high growth and low inflation was a worldwide flood of easy money.

• But in fact emerging markets have shadowed each other surprisingly closely in recent years, as Ruchir Sharma of Morgan Stanley points out in his new book, “Breakout Nations”.

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Tiger economies• East Asia has a record of high and sustained economic growth

during the last twenty-five years.

• Most of this growth occurred in eight economies - Japan, Hong Kong, the Republic of Korea, Singapore, Taiwan, and the newly industrializing Indonesia, Malaysia, and Thailand.

• The High Performing Asian Economies (HPAEs) use a variety of policies to achieve three functions of growth - accumulation, allocation, and productivity growth.

• 1965-90 GNP per capita growth rate was between 5-6 percent.

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• Since 1960, the HPAEs have grown more than twice as fast as the rest ofEast Asia, roughly three times as fast as Latin America and South Asia, and five times faster than Sub-Sahann Africa.

• They also significantly outperformed the industrial economies and the oil-rich Middle East-North Africa region.

• Between 1960 and 1985, real income per capita increased more than four times in Japan and the Four Tigers and more than doubled in the Southeast Asian NIEs

• The HPAEs have also been unusually successful at sharing the fruits of growth.

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What caused EastAsia's success?• In large measure the HPAEs achieved high growth by getting the basics right. • Private domestic investment and rapidly growing human capital were the

principal engines of growth. • High levels of domestic financial savings sustained the HPAEs' high investment

levels. • Agriculture, while declining in relative importance, experienced rapid growth

and productivity improvement. • Population growth rates declined more rapidly in the HPAEs than in other

parts of the developing world. • And some of these economies also got a head start because they had a better-

educated labor force and a more effective system of public administration. • In this sense there is little that is miraculous about the HPAEs' superior record

of growth; it is largely due to superior accumulation of physical and human capital.

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• In most of these economies, in one form or another, the government intervened systematically and through multiple channels-to foster development, and in some cases the development of specific industries.

• Policy interventions took many forms: targeting and subsidizing credit to selected industries, keeping deposit rates low and maintaining ceilings on borrowing rates to increase profits and retained earnings, protecting domestic import substitutes, subsidizing declining industries, establishing and financially supporting government banks, making public investments in applied research, establishing firm- and industry-specific export markets, developing export marketing institutions, and sharing information widely between public and private sectors.

• Some industries were promoted, while others were not.

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Sr. No.

Contents, Cases and Essential Reading

1. Introduction to the course, discussion on the concepts, overall course outline. Allocation of term paper topic Readings: Rastogi Anupam (2001) – Emerging Equity Markets, Liverpool Investment Letter, January 2001, Cardiff Business School Rastogi Anupam (2004) – Emerging Equity Markets, Liverpool Investment Letter, January 2004, Cardiff Business School Rastogi Anupam (2007) – Emerging Equity Markets, Liverpool Investment Letter, January 2007, Cardiff Business School Rastogi Anupam (2010) – Emerging Equity Markets, Liverpool Investment Letter, May 2010, Cardiff Business School

2. China – Political System Readings: Abrami R.M. and Weiqi Zhang (2008) – China : The Political System (HBS – 9-308-063)

3. China – Economy Readings: Abrami R.M. et.al. (2009) – Political and Economic History of the PRC: An Annotated Timeline (HBS – 9-309-073) McFarlan Warren F. (2006) – China’s Financial Markets : 2006 (HBS-9-307-058)

4. China – Infrastructure Development Readings: Rajiv Lall, Ritu Anand, and Anupam Rastogi (2010) -Developing Physical Infrastructure: A Comparative Perspective on the Experience of the People’s Republic of China and India, Manila, Asian Development Bank (under publication)

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5. China – Doing Business in ChinaCase : William Kirby et.al. (2008) – The Challenges of Launching a statrt-up in China : Dorm99.com (HBS – 9-307-075)

6. Brazil – Political and Economic SystemCase – Brazil 2003:Inflation Targetting and Debt Dynamics

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Brazil – Doing Business in BrazilCase – The Business Environment of Brazil: Navigating the Financial Crisis (2009) (IB-96)

9. Russia – Political and Economic SystemReadings: The Competitive Advantage of Russia (Case IB-73)-2008

10. Russia – Doing Business in RussiaCase – Gazprom (A):Energy and Strategy in Russina History (HBS – 9-709-008)

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Sr. No.

Contents, Cases and Essential Reading

1. Transition from a developing to an emerging economy – study of some countries.

2. Investment prospects in emerging markets of Asia, Latin America, Eastern Europe and Middle East and Africa. Reading: World Investment Prospects to 2011 by Economist Intelligence Unit.

3. Doing business in developing countries. Reading: Strategies that fit emerging markets by Tarun Khanna et al HRB June 2005

4. The macro perspective: China and India. Reading: Vietor, Richard, and Emily Thompson. “India on the Move.” HBS Case: 9-703-050, March 10, 2008. Oi, Jean, Chris Bebenek, and Debora Spar. “China: Building ‘Capitalism with Socialist Characteristics.” HBS Case: 9-706-041, October 16, 2006. Superpower by Raghav Behl, Penguin Allen Lane.

5.Nigeria:Readings to be decided.

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6.

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South East Asia:Readings : Alfaro, Laura, Rafael Di Tella, and Renee Kim. “Chronology of the Asian Financial Crisis.” Harvard Business School Case, Harvard Business School Publishing. Case: 9-708-001, February 8, 2008. Pill, Huw, Rafael Di Tella, and Jonathan Schlefer. “Financial Crisis in Asia: 1997-1998 (Abridged).” Harvard Business School Publishing. Case: 9-709-004, October 31, 2008.

Mexico: Readings: Pill, Huw, and Courtenay Sprague. “World to Mexico: Get a Grip! Boston, MA: Harvard Business School, 1997. Case No. 9-796-123. Froot, Kenneth A, and Matthew McBrady. “The 1994-95 Mexican Peso Crisis.” Boston, MA: Harvard Business School, 1999. Case No. 9-296-056.

Africa – Open for Business, Economist, Intelligence Unit.

Brazil Reading : To be decided

Project Report presentation or macroeconomic strategy which address 1-2 key users in a country.

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Sr. No. Contents, Cases and Essential Reading1. Introduction to the course, discussion on the concepts, overall course outline.Allocation of term paper topicReadings:Rastogi Anupam (2001) – Emerging Equity Markets, Liverpool InvestmentLetter, January 2001, Cardiff Business SchoolRastogi Anupam (2004) – Emerging Equity Markets, Liverpool InvestmentLetter, January 2004, Cardiff Business SchoolRastogi Anupam (2007) – Emerging Equity Markets, Liverpool InvestmentLetter, January 2007, Cardiff Business SchoolRastogi Anupam (2011) – Emerging Equity Markets, Liverpool InvestmentLetter, January 2011, Cardiff Business School2. China – Political SystemReadings:Abrami R.M. and Weiqi Zhang (2008) – China : The Political System (HBS –9-308-063)

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3. China – EconomyReadings:Abrami R.M. et.al. (2009) – Political and Economic History of the PRC: AnAnnotated Timeline (HBS – 9-309-073)McFarlan Warren F. (2006) – China’s Financial Markets : 2006 (HBS-9-307-058)4. China – Infrastructure DevelopmentReadings:Rajiv Lall, Ritu Anand, and Anupam Rastogi (2010) -Developing PhysicalInfrastructure: A Comparative Perspective on the Experience of the People’sRepublic of China and India, Manila, Asian Development Bank (underpublication)5. China – Doing Business in ChinaCase : William Kirby et.al. (2008) – The Challenges of Launching a start-up inChina : Dorm99.com (HBS – 9-307-075)

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6. Brazil – Political and Economic SystemCase – Brazil 2003:Inflation Targetting and Debt Dynamics (HBS 9-704-028)7 Brazil – Doing Business in BrazilCase – The Business Environment of Brazil: Navigating the Financial Crisis(2009) (IB-96)8. Russia – Political and Economic SystemReadings: The Competitive Advantage of Russia (Case IB-73)-20089. Russia – Doing Business in RussiaCase – Gazprom (A):Energy and Strategy in Russian History (HBS – 9-709-008)10. Mexico’s dilemmaCase – Mexico : Crisis and Competitiveness(HBS – 9-710-058)

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11. Mexico – Doing Business in MexicoCase – Pepsico in Mexico (TB0219)12. Turkey – Doing Business in Transitional Economies ICase – Cooperating to Compete (HBS 9-799-024)Read - Managing Risk in an Unstable World by Ian Bremmer (HBR)13. Turkey – Doing Business in Transitional Economies IICase – Garanti Bank (HBS 9-300-114)14. Indonesia – Problems of Exchange RateCase – The Asian Financial Crisis - Indonesia (HKY093)15. Indonesia – Government and InfrastructureCase – Freeport Indonesia (HBS 9-796-124)16. South Africa – Issues in FDICase – FDI and South Africa (HBS 9-707-019)17. Class presentation and discussion of China Based Projects