Do Emerging Markets Ever
Become Developed Countries? What Determines
I recently attended a dinner party at which I was engaged in a conversation with a prominent venture capitalist from Switzerland. After I explained my firm's focus on venture capital and strategic planning in emerging markets, he asked a rather pointed question; are developing countries destined to remain as such, or will they actually transition to developed and mature countries?
The ramifications of his question where quite obvious; if developing countries cannot transition to developed and mature nation states the impact on investment, return, market growth and global stability in general must be thrown into question. And if the transition is possible what factors will determine a successful transition? And based on this model how does the universe of emerging markets stack up on the transition timeline?
First, let me answer the original question and then provide the evidence to support my position. In a simple, straightforward and somewhat intuitive response - yes - I believe that the developing countries of today can transition to become the developed countries of tomorrow. However I also believe that not all will be successful in the transition and that in some cases certain countries will actually regress in the transition process. While this response is rather simplistic I do believe that it is shared by a majority of CEO's, policy makers and the academic community in general. However, I also believe that this same group also believes that there will be winners and losers in the transition game!
What should be of greater concern to all involved is that while we believe that there will be winners and losers in this arena, and that in fact even the winners will not reach the finish line at the same time. The objective analytical assessment of this universe of contenders is often ignored or discounted by CEO's and policy makers when making strategic decisions that will have a direct impact on investment, shareholder value, and geopolitical outcomes.
What are the proven ramifications resulting from a lack of disciplined, methodical assessment of emerging markets and their ability to transition to developed markets? Well to put it in a nutshell, loss of capital, loss of resources and at the extreme end of the spectrum - loss of life!
Argentina is a prime example of a country that has actually lost ground in the transition process. Achieving independence from Spain in 1816, Argentina has had a spotty record of good governance and strong institutions. Having endured a long period of authoritative rule by the Peronists, the country was later ruled by a military junta only to see democratic rule return in 1983.
While Argentina is a democracy, weak judicial and political institutions have led to wide spread endemic corruption. This corruption has manifested itself in such scandals as "Swift-gate" - an alleged attempt by officials of the Menem government to solicit bribes from the Swift meatpacking concern, to Somisa - the sell-off of the army's steel works that was losing $1 million dollars per day. This corruption has eroded the confidence of the people in their government and eroded the confidence of the IMF and other institutions in the ability of any Argentine government to administer funds in a responsible and ethical manner. The results of this lack of good governance are now all too clear, with rioting in the streets, economic free-fall, and Argentine government officials using populist rhetoric to explain and justify the latest economic disaster.
Populist rhetoric will not solve Argentina's woes, nor will it calm a population that has grown cynical from years of widespread corruption. What Argentina needs and needs now is a dramatic reform of key institutions to include; judicial, legislative and financial coupled with a sensible set of economic reforms that are sensitive to short term human needs while focusing on the long term economic success of Argentina. However, until politicians stop feeding from the trough of corruption and good governance takes hold in Argentina the future will look all too much like the past.
If we are to believe a country can successfully transition from a developing market to a developed one, then what are the factors that should be used to determine if a country is developed or emerging and how can those factors be weighted to identify where that country sits on the transition timeline? Obviously these factors and the resulting model should have a direct impact on direct investment decisions as investments in countries that are moving in a coherent and positive track to a developed stage should offer a significantly higher long term return with much greater stability.
I believe that a number of factors have had a historical impact on the transition of countries from developing to a developed/mature stage. These factors include:
Per capita GDP and rate of growth;
Size and growth of the middle class;
Healthcare expenditures and rate of growth;
Education expenditures, penetration and rate of growth;
Poverty level and rate of growth/decline;
Crime/Corruption/ rate of growth/decline and levels of penetration;
Depth and strength of Institutions:
Obviously not all of these indicators can be expected to advance in lock step. However, care and caution should be exercised when we see a country move forward dramatically in one area with negligible movement in other areas. As we have seen with Argentina, progress must be across the board otherwise the results can be disastrous.
This begs an obvious question. What about China? The country has made dramatic gains over the past 15 years in economic growth, infrastructure development, and the growth of a middle class. However, the country is still ruled in a dictatorial fashion with minimal human rights and a number of extremely weak institutions to include the judicial system and a free press. For China this makes for an uncertain future.
In an article by Daniel Kaufman & Co. called Governance Matters: From Measurement to Action he and his colleagues make the case for a direct link between governance and economic development. The six points of governance that he focuses on are: voice and accountability, political instability and violence, government effectiveness, regulatory burden, rule of law and control of corruption. Not surprisingly, he has found that good governance is strongly correlated with better development. This analysis runs contrary to the argument put forth by some of the worst practitioners of good governance to include; Indonesia, Colombia, Rwanda and North Korea that state that only wealthy countries can afford the luxury of good governance. For those countries I would respond to my friend's question by saying that the future was not very bright indeed!
William J. Nóbrega is President of the Venture Capital and Strategic Planning Group of The Conrad Group, Inc. based in Atlanta, GA. The company has a mandate to identify, develop and initiate global business models in emerging geographies with a focus on technology, CRM, and transportation. He was a Partner with Tellus in one of the largest call center and telemarketing operations in Brazil and formerly responsible for the development of the Pharmaceutical and Medical Device Global Industry Group with Deloitte & Touche Consulting Group. Contact: firstname.lastname@example.org .
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