The Emerging Strength of Emerging Markets

The rise of emerging markets appears to be the defining economic theme of the current decade – much as information technology was in the 1990s and Japan’s manufacturing prowess was in the 1980s. Both of those stories, however, ultimately ended in speculative excess and painful corrections. Will the same thing happen in the BRIC (Brazil, Russia, India and China) countries? Or is the emerging markets boom still in its infancy? If the answer to the latter question is yes, will the developed world turn to protectionism in an attempt to preserve its dominant position in the global economy?

Moderator Prannoy Roy, President, New Delhi Television (NDTV), India, kicked off the discussion with a brief statistical overview. Over the past four years, he noted, the major emerging equity markets have risen an average of 366%, with some markets, such as Russia’s, achieving more than twice that. Ten years ago inflation in the emerging world averaged 30%; it has since fallen to 5%. Foreign currency reserves of the emerging countries have more than tripled since 2000, to US$ 3,000 billion. If current relative growth rates are maintained, by 2050 the Chinese GDP will equal 90% of US output, while India’s will equal 60%. At the same time, however, equity market capitalization in the developing world still only equals 20% of GDP, versus 70% in the developed world. This, he said, suggests room for continued appreciation.

Frederick W. Smith, Chairman, President and Chief Executive Officer, FedEx Corporation, USA, said his firm recently commissioned a study of the sources of economic success in the emerging world, which found an overwhelming correlation between openness to foreign investment and trade and rapid economic growth. In many countries, public investment in education and training is bearing fruit, creating a "critical mass of human talent", said Michael D. White, Chairman and Chief Executive Officer, PepsiCo International, USA. This, he added, has created a "self-reinforcing cycle of success" – one that has also been reflected in Pepsi’s own growth in the emerging world.

That same success, however, is triggering a political backlash in the developed world, complained Herman Gref, Minister of Economic Development and Trade of the Russian Federation. Fears of foreign takeovers and low-wage competition, he said, have led to an abrupt role reversal. The developed countries once preached the benefits of openness and liberalization to the emerging world. Now they take a go-slow approach to further reductions in trade barriers and insist on having a veto over foreign investment in "sensitive" sectors. "They are reverting to polices that are far from liberal," Gref said.

Smith, however, said such concerns are exaggerated – despite the six-month deadlock in the Doha Round of global trade talks and the well-publicized controversy over last year’s attempt by a Dubai-owned company to assume control of several US ports. Such disputes, Smith said, are inevitable in any parliamentary democracy, and do not reflect the true views of most American politicians. "Almost everybody in the US Congress understands what everybody in this room understands – that free trade and liberalization are good things," Smith said. Future trade deals may only pass by one vote, but they will pass, he predicted.

But will the same prove true in the emerging world? Several participants argued that anti-globalization pressures are also rising in the developing countries, raising the question of whether authoritarian regimes have an inherent advantage in forcing through painful reforms. However, Jamshyd N. Godrej, Chairman and Managing Director, Godrej & Boyce, India, rejected that suggestion. India’s experience, he said, demonstrates that emerging world democracies can make the tough decisions – and in fact, may have the advantage because of the social consensus that can be formed through the democratic process. "I would say democracy has served India very well," he concluded.

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