Seeking A New Paradigm

Author: Laurence Neville

Emerging markets countries are unlikely to repeat the growth miracles of the past. But that doesn’t mean many won’t continue to outperform developed markets. Meantime, new definitions are arising to delineate these markets.

Emerging markets have been with us for more than a generation. Coined in 1981 by World Bank economist Antoine van Agtmael, the term “emerging markets” replaced descriptions such as “developing countries” or “third world,” which focused on these countries’ lack of development or importance (the first and second worlds were helmed by the US and Soviet Union). In contrast, “emerging markets” was optimistic: These were the next generation of global economic development.

The description found favor and was in common use by 2001, when Goldman Sachs chief economist Jim O’Neill came up with a nifty new moniker for the largest emerging markets—BRICs (for Brazil, Russia, India and China). Throughout this century’s first decade and beyond the financial crisis, the term emerging markets seemed to reflect a self-fulfilling prophecy—they were growing so fast that some observers speculated they could soon be described as “emerged.”

Now the BRIC countries are on different trajectories. China’s growth is slowing as it builds a consumer economy, Brazil is stagnating because of structural and infrastructural challenges, and Russia is focused on geopolitics rather than economics. Only India (after years as a laggard) is trying to reboot reform efforts to boost growth and modernize its economy. The divergence of the BRICs—and the slowdown of emerging markets’ growth—raises questions about the usefulness of “emerging markets” as a description for those countries that make up the majority of the world’s population. Moreover, it raises a further question: Is the halcyon period of emerging markets growth that ran from the 1990s to just after the financial crisis over for good? And how can we best differentiate the opportunities that do exist?


To ascertain whether emerging markets is an obsolete term, we must first understand what it means. Emerging markets were defined not by common economic characteristics but as an investment opportunity, according to Benoit Anne, head of emerging markets strategy at Société Générale (SG). When the term first came into being, most investors looked only at developed markets; emerging markets as a category for investment was a differentiator from previous investment strategies, he explains.

But these newly-defined markets nevertheless had shared characteristics. When it came to foreign investment flows, “Emerging markets moved as a group,” says Maarten-Jan Bakkum, senior strategist “emerging markets” at ING Investment Management. “Global drivers—such as Chinese demand growth for raw materials, global trade growth and abundant global liquidity thanks to easy US monetary policy—dominated endogenous [domestic] drivers.”

Emerging markets also had a shared history, having come of age as the Cold War ended (creating a political vacuum that spurred experimentation) and globalization accelerated. Globalization enabled emerging markets countries to import capital, technology and knowledge and to export what they produced, notes Neil Shearing, chief emerging markets economist at independent research firm Capital Economics.

It prompted the widespread adoption of export-oriented industrialization, described as “history’s most certain path to riches” by Dani Rodrik, professor of social science at the Institute for Advanced Study (IAS), Princeton, and author of The Globalization Paradox: Democracy and the Future of the World Economy. Globalization also encouraged the formation of a loose consensus with economic and financial reform at its heart.

One important characteristic shared by most of the countries that have achieved emerging markets status over the past 30 years is the responsiveness of their governments—regardless of political creed—to demands from their populations. “People in emerging markets are poor and have no protection against inflation or economic instability,” says Jan Dehn, head of research at Ashmore Investment Management, which has $71.3 billion in funds under management. “They want improved living standards rather than ideology.” Local political accountability has resulted in economic stability and growth. While there have been plenty of market panics since 1998, “the fundamental strength of emerging markets has not been undermined,” says Dehn.


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