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8/9/2019 What Are Emerging Markets by Anuj
1/23
Seminar Report
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Contents
1. Emerging Markets 01
2. Introduction 01
3. Characteristics 02
4. Formation Of Emerging Markets 03
5. Rise Of Emerging Markets 04
6. Challenges 04
7. Prospects 05
8. BRIC Emerging Economies 06
9. BRIC: The Path To 2050 07
10. BRIC Summit 10
11. BRIC: The World's Biggest Emerging Economies 13
12. Emerging Market India 16
13. Capital Flows To Emerging Economies 17
14. Emerging Economies To Drive Global Recovery In 2010 19
15. Bibliography 20
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Emerging Markets
INTRODUCTION
Emerging markets are countries that are restructuring their economies along market-
oriented lines and offer a wealth of opportunities in trade, technology transfers, and
foreign direct investment. Emerging markets are nations with social or business
activity in the process of rapid growth and industrialization. Currently, there are
approximately 28 emerging markets in the world, with the economies of China and
India considered to be by far the two largest. According to According to the World
Bank, the five biggest emerging markets are China, India, Indonesia, Brazil and
Russia. Other countries that are also considered as emerging markets include Mexico,
Argentina, South Africa, Poland, Turkey, and South Korea. These countries made a
critical transition from a developing country to an emerging market. Each of them is
important as an individual market and the combined effect of the group as a whole
will change the face of global economics and politics. Developing countries that are
neither part of the least developed countries, nor of the newly industrialized countries
Term Originally brought into fashion in the 1980s by then World Bank economist
Antoine van Agtmael, the term is sometimes loosely used as a replacement for
emerging economies, but really signifies a business phenomenon that is not fully
described by or constrained to geography or economic strength; such countries are
considered to be in a transitional phase between developing and developed status.
Examples of emerging markets include China, India, some countries of Latin America
(particularly Argentina, Brazil, Chile, Mexico and Peru), some countries in Southeast
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Asia, most countries in Eastern Europe, Russia, some countries in the Middle East
(particularly in the Persian Gulf Arab States), and parts of Africa (particularly South
Africa). Emphasizing the fluid nature of the category, political scientist Ian Bremmer
defines an emerging market as "a country where politics matters at least as much as
economics to the markets.
Characteristics.
First, they are regional economic powerhouses with large populations, large resource
bases, and large markets. Their economic success will spur development in the
countries around them; but if they experience an economic crisis, they can bring their
neighbors down with them.
Second, they are transitional societies that are undertaking domestic economic and
political reforms. They adopt open door policies to replace their traditional state
interventionist policies that failed to produce sustainable economic growth.
Third, they are the world's fastest growing economies, contributing to a great deal of
the world's explosive growth of trade. By 2020, the five biggest emerging markets'
share of world output will double to 16.1 percent from 7.8 percent in 1992. They will
also become more significant buyers of goods and services than industrialized
countries.
Fourth, they are critical participants in the world's major political, economic, and
social affairs. They are seeking a larger voice in international politics and a bigger
slice of the global economic pie.
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Formation of Emerging Markets
There are two potential causes for the creation of emerging markets: the failure of
state-led economic development and the need for capital investment. First, state-led
economic development failed to produce sustainable growth in the traditional
developing countries. This failure and its tremendous negative impact pushed those
countries to adopt open door policies, and to change from the state's being in charge
of the economy to facilitating economic growth along market-oriented lines. Second,
the developing counties desperately needed capital to finance their development, but
the traditional government borrowing failed to fuel the development process. In the
past, the governments of the developing countries borrowed either from commercial
banks or from foreign governments and multilateral lenders like the IMF and the
Word Bank. This often resulted in heavy debt overload and led to a severe economic
imbalance. The past track record of many developing countries also demonstrates
their inability to well manage and efficiently operate the borrowed funds to support
economic growth. In light of the unsatisfactory results of government borrowing,
developing countries began to rely on equity investment as a means of financing
economic growth. They seek to attract equity investment from private investors who
will become their partners in development. To attract equity financing, a developing
country has to establish the preconditions of a market economy and create a business
climate that meets the expectations of foreign investors. This change in financing
sources thus became another factor leading to the rise of emerging markets.
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Rise of Emerging Markets
The rise of emerging markets is changing the traditional view of development as
follows.
First, foreign "investment" is replacing foreign "assistance." Investing in the
emerging markets is no longer associated with the traditional notion of providing
development assistance to poorer nations.
Second, emerging markets are rationalizing their trade relations and capital
investment with industrialized countries. Trade and capital flows are directed more
toward new market opportunities, and less by political consideration.
Third, the increasing two-way trade and capital flows between emerging markets and
industrialized countries reflect the transition from dependency to global
interdependency. The accelerated information exchange, especially with the aid of the
Internet, is integrating emerging markets into the global market at a faster pace.
Challenges
In their effort to create a market economy and to ensure sustainable development,
emerging markets still face big challenges that come from fundamental problems
associated with their traditional economic and political systems. A market economy
requires those countries to redefine the role of the government in the development
process and to reduce the government's undue intervention. Another serious problem
that those countries have to confront is controlling corruption, which distorts the
business environment and impedes the development process.
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An even more challenging task for those countries is to undertake structural reforms
with their financial system, legal system, and political system, so as to guarantee a
disciplined and stable economy that is relatively free of political disturbances and
interference.
Prospects
Emerging markets are the "key swing factor" in the future growth of world trade and
global financial stability, and they will become critical players in global politics. They
have a huge untapped potential and they are determined to undertake domestic
reforms to support sustainable economic growth. If they can maintain political
stability and succeed with their structural reforms, their future is promising.
MSCI list (Morgan Stanley Capital International) as of April 2009, MSCI
classified the following 22 countries as emerging markets:
1. Brazil
2. Chile
3. China
4. Colombia
5. Czech
Republic
6. Egypt
7. Hungary
8. India
9. Indonesia
10. Israel
11. Malaysia
12. Mexico
13. Morocco
14. Peru
15. Philippines
16. Poland
17. Russia
18. South
Africa
19. South
Korea
20. Taiwan
21. Thailand
22. Turkey
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The BRIC Emerging Economies
Sao Parulo, Brazil.
Goldman Sachs argues that the economic potential of Brazil, Russia, India, and China
is such that they could become among the four most dominant economies by the year
2050. The thesis was proposed by Jim O'Neill, global economist at Goldman Sachs.
These countries encompass over 25% of the world's land coverage and 40% of the
world's population and hold a combined GDP (PPP) of 15.435 trillion dollars. On
almost every scale, they would be the largest entity on the global stage. These four
countries are among the biggest and fastest growing emerging markets.However, it is
not the intent of Goldman Sachs to argue that these four countries are a political
alliance (such as the European Union) or any formal trading association, like ASEAN.
Nevertheless, they have taken steps to increase their political cooperation, mainly as a
way of influencing the United States position on major trade accords, or, through the
implicit threat of political cooperation, as a way of extracting political concessions
from the United States, such as the proposed nuclear cooperation with India.
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Dreaming with BRICs: The Path to 2050
Moscow, Russia.
The BRIC thesis (defended in the paperDreaming with BRICs: The Path to 2050)
recognizes that Brazil, Russia, India and China have changed their political systems to
embrace global capitalism. Goldman Sachs pr, to be the dominant global suppliers of
manufactured goods and services while Brazil and Russia would become similarly
dominant as suppliers of raw materials. Cooperation is thus hypothesized to be a
logical next step among the BRICs because Brazil and Russia together form the
logical commodity suppliers to India and China. Thus, the BRICs have the potential
to form a powerful economic bloc to the exclusion of the modern-day states currently
of "Group of Eight" status. Brazil is dominant in soy and iron ore while Russia has
enormous supplies of oil and natural gas.
Following the end of the Cold War or even before, the governments comprising BRIC
all initiated economic or political reforms to allow their countries to enter the world
economy. In order to compete, these countries have simultaneously stressed
education, foreign investment, domestic consumption, and domestic entrepreneurship.
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Follow-up report
Mumbai, India.
The Goldman Sachs global economics team released a follow-up report to its initial
BRIC study in 2004.The report states that in BRIC nations, the number of people with
an annual income over a threshold of $3,000, will double in number within three years
and reach 800 million people within a decade. This predicts a massive rise in the size
of the middle class in these nations. In 2025, it is calculated that the number of people
in BRIC nations earning over $15,000 may reach over 200 million. This indicates that
a huge pickup in demand will not be restricted to basic goods but impact higher-
priced goods as well. According to the report, first China and then a decade later India
will begin to dominate the world economy.
Yet despite the balance of growth, swinging so decisively towards the BRIC
economies, the average wealth level of individuals in the more advanced economies
will continue to far outstrip the BRIC economy average. Goldman Sachs estimates
that by 2025 the income per capita in the six most populous EU countries will exceed
$35,000, whereas only about 500 million people in the BRIC economies will have
similar income levels.
The report also highlights India's great inefficiency in energy use and mentions the
dramatic under-representation of these economies in the global capital markets. The
report also emphasizes the enormous populations that exist within the BRIC nations,
which makes it relatively easy for their aggregate wealth to eclipse the G6, while per-
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capita income levels remain far below the norm of today's industrialized countries.
This phenomenon, too, will affect world markets as multinational corporations will
attempt to take advantage of the enormous potential markets in the BRICs by
producing, for example, far cheaper automobiles and other manufactured goods
affordable to the consumers within the BRICs in lieu of the luxury models that
currently bring the most income to automobile manufacturers. India and China have
already started making their presence felt in the service and manufacturing sector
respectively in the global arena. Developed economies of the world have already
taken serious note of this fact.
A Goldman Sachs paper published later in December 2005 explained why Mexico
and South Korea were not included in the original BRICs. According to the paper,
among the other countries they looked at, only Mexico and South Korea have the
potential to rival the BRICs, but they are economies that they decided to exclude
initially because they looked at them as already more developed.
Follow-up report
Pudong, Shanghai, China.
This report compiled by lead authors Tushar Poddar and Eva Yi gives insight into
"India's Rising Growth Potential". It reveals updated projection figures attributed to
the rising growth trends in India over the last four years. Goldman Sachs assert that
"India's influence on the world economy will be bigger and quicker than implied in
our previously published BRICs research". They noted significant areas of research
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and development, and expansion that is happening in the country, which will lead to
the prosperity of the growing middle-class.
"India has 10 of the 30 fastest-growing urban areas in the world and, based on current
trends, we estimate a massive 700 million people will move to cities by 2050. This
will have significant implications for demand for urban infrastructure, real estate, and
services."
In the revised 2007 figures, based on increased and sustaining growth, more inflows
into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020,
India's GDP per capita in US$ terms will quadruple", and that the Indian economy
will surpass the United States (in US$) by 2050. It states that the four nations as a
group will overtake the G7 in 2032.
BRIC Summit
Leaders at the 1st BRIC summit. From left are:
1. President Luiz Incio Lula da Silva of Brazil;
2. President Dmitry Medvedev of Russia;
3. President Hu Jintao of China, and
4. Prime Minister Manmohan Singh of India.
The BRIC countries met for their first official summit
on 16 June 2009, in Yekaterinburg, Russia, with Luiz
Incio Lula da Silva, Dmitry Medvedev, Manmohan Singh, and Hu Jintao, the
respective leaders of Brazil, Russia, India and China, all attending. The core focus of
the summit was related to improving the current global economic situation and
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discussing how the four countries can better work together in the future, as well as a
more general push to reform financial institutions. There was also discussion
surrounding how developing nations, such as those members of BRIC, could be better
involved in global affairs in the future. In the aftermath of the summit the BRIC
nations suggested that there was a need for a new global reserve currency that is
'diversified, stable and predictable' The statement that was released stopped short of
making a direct attack on the perceived 'dominance' of the US dollar, something
which the Russians have been critical of; however, it still led to a fall in the value of
the dollar against other major currencies.
The foreign ministers of the BRIC countries had met previously on May 16, 2008 also
in Yekaterinburg.
One week prior to the summit, Brazil offered $10 billion to the International
Monetary Fund. It was the first time that the country had ever made such a loan.
Brazil had previously received loans from the IMF and this announcement was treated
as a significant demonstration of how Brazil's economic position had changed. China
also announced plans to invest a total of $50.1 billion and Russia planned to invest
$10 billion.
Date Host country Host leader Location held1st June 16, 2009 Russia Dmitry Medvedev Yekaterinburg
2nd April 16, 2010 Brazil Luiz Incio Lula da Silva Brasilia
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Brazil, Russia, India, and China (BRIC)
Brazil
President (head of state and government): Luiz Incio Lula da Silva Currency- Real (US $1= 1.87)
GDP (nominal)- $1.572 trillion [10th]
GDP (PPP)- $2.024 trillion [9th]
Per Capita- $7.7 thousand [60th]
RussiaPresident (head of state): Dmitry MedvedevPrime Minister (head of government):Vladimir Putin
Currency- Ruble (US $1=30.362) GDP (nominal)- $1.676 trillion [8th]
GDP (PPP)- $2.103 trillion [8th]
Per Capita- $8.8 thousand [54th]
IndiaPresident (head of state): Pratibha PatilPrime Minister (head of government):Manmohan Singh
Currency- Rupee (US $1=46.62)
GDP (nominal)- $1.242 trillion [12th]
GDP(PPP)- $3.298 trillion [4th]
Per Capita- $1.0 thousand [139th]
ChinaPresident (head of state): Hu JintaoPremier (head of government): Wen Jiabao
Currency -Yuan (US $1=6.82)
GDP (nominal)- $4.327 trillion [3rd]
GDP(PPP)- $8.767 trillion [2nd]Per Capita- $3.5 thousand [99th
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BRIC: The world's biggest emerging economies
The worlds four biggest emerging economies are grabbing growing volumes of
global capital flows, with firms and fund managers increasingly viewing BRIC
consumer demand as a high-return, relatively safe investment bet. Brazil, Russia,
India and China, with 40% of the worlds population, account for about 20% of its
gross domestic product, a share Goldman Sachs said will rise to equal that of the G7
industrialized countries as early as 2032.
There was a sign this year of the shape of things to come as China overtook the US as
the worlds biggest car market. And as incomes of 2.5 billion people steadily rise,
companys profits as well as stock markets will feel the effect. No surprise that cash
direct investment and portfolio capital is increasingly gravitating to these giants.
Fund tracker EPFR Global said BRIC-geared equity funds absorbed almost $20
billion in January to November 2009. This is double 2007 levels and equivalent to
40% of what was taken by emerging stock funds, some of which also went to the
BRICs.The trend of BRIC out performance has been very powerful and should
continue as growth is concentrated in these markets, said Martial Godet, who helps
manage 37 billion euros in emerging stocks at BNP Paribas Asset Management in
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Paris. We are betting on the largest, highest-growth markets with the biggest
populations and good liquidity levels.
To capitalise on BRIC consumer demand, Goldman Sachs suggests investing in a
basket of 50 developed market stocks positioned to benefit from the BRICs theme,
and one of 50 BRICs companies that are likely to emerge as global market winners.
Already, BRICs are outgunning broader emerging stocks the MSCI BRIC index is up
90% in 2009 versus 70% for MSCIEM ,with only China lagging.
An investment in Brazilian stocks in 2000 would have quadrupled by now while cash
put in emerging stocks would merely have doubled. And a buyer of world stocks
would have lost money. As monetary policies start to tighten next year, investors on
average expect BRIC stocks to rise 20-25% in 2010 after the near triple-digit returns
of 2009.
But in future the BRICs as the most liquid emerging markets will gain most from
higher allocations to emerging markets. Goldman Sachs economist Jim ONeill, who
first came up with the BRIC concept, projects the BRICs to comprise almost half
global stock markets by 2050 from less than 10% now. He says it is inevitable more
cash will move to the BRIC markets.
If you think of a GDP-weighted benchmark, it would be considerably higher than the
current MSCI-type ones, ONeill said, referring to indices that use GDP to weight
countries. For some asset managers, especially the sovereign wealth funds, this is
what they are moving towards.
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Fund managers say cash will go where growth is or where the value is. With
China and India posting the highest growth in the world, and Russia trading at a 40%
discount to emerging markets, the bloc should remain an investment magnet.
Consumer demand is seen as key to the post-crisis global recovery, and at the heart of
the BRIC story is the consumer.
This is the main driver behind the surging tide of direct investment into the BRICs
which took in 16% of global direct investment flows in 2008. This is a third up from
the previous year, a total $265 billion, or over half of what was received by the 16-
nation European Union, United Nations agency UNCTAD says. Take Chinas car
market, which made headlines earlier this year. With 10 cars per 1,000 Chinese, there
is a lot more room for sales growth than the US which has one car for two people.
What is happening is a rebalancing of global consumption, away from advanced
economies and towards emerging markets, says Goldman Sachs, a process expedited
by the shock caused to household wealth and employment by the financial crisis.
GS predicts Chinese household consumption to rise 10% in 2010, with Brazilian and
Indian demand also up over 5%, while spending in the developed world remains flat.
Global corporates have cottoned on. Japanese electronics firm Panasonic for instance
said last month it aims for 15-20% annual sales growth in the BRICs to compensate
for falling demand from Japans shrinking population. No wonder then that firms are
rushing to set up production in the BRICs UNCTADs 2009-2011 investment
outlook survey found all four countries to be in the top five most favoured investment
destinations with China topping the list.What investors in BRIC are saying is: we
believe in GEM (global emerging markets), but to a great extent, whats happening in
GEM is in these four countries, said Alex Tarver, who helps manage $1.9 billion in
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BRIC stocks at HSBC. It is a microcosm and one thats large enough to drive
regional growth.
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Emerging Market India
India ranks among the well known emerging markets in the global economic scenario.
Since the economic liberalization policies were undertaken in the 1990s, emerging
market India has really prospered which has helped to boost the Indian economy to a
great extent.
Factors behind the favorable emerging market in India
In simple terms, emerging market is used to evaluate the socio economic scenario of
the country in terms of the growth of the market and industrial development.
According to the recent survey, there are around 28 emerging markets in the world
out of which India ranks in the second place.
The main factors behind this booming emerging market are the economic
liberalization and the perfect competition market, the high standard of living and per
capita income, the development of medical facilities and infrastructure, the increase in
foreign investments and so on. Over the few years, there has been a significant growth
of the Indian market which has resulted in the high Gross Domestic Product (GDP).
The average annual growth rate ranges between 6 to 7 %. The growth rate of GDP
was around 6.7 % during the financial year 2008-09.
To boost the emerging market India, the government is also taking some positive
steps. The main aim is to increase the growth rate to around 9 %. Due to the favorable
emerging market, more and more industries are being set up and the customer base is
also increasing. Currently, India is the 4th largest economic system in the world in
terms of the purchasing power parity.
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The recent economic development has also put a positive impact on the various
sectors.
There has been a significant development in the agricultural, service and industrial
sector in the country. Today, to complement the rapid pace of economic growth, the
service sector contributes around 54 % of the annual Gross Domestic Product.
Foreign investment and emerging market India
The increase in foreign investment has also cast a favorable effect on the emerging
market in India. Due to the increase in demand, well known global companies are
investing in the Indian market. The foreign institutional investments (FII) amount has
reached around US$ 10 billion mark. In case of the Foreign direct investments (FDI,
there has been a significant increase of around 85.1 % from US$ 25.1 billion to US$
46.5 billion.
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Capital flows to emerging economies
The Institute of International Finance, a
bankers group, reckons that net flows of
private capital to emerging economies fell to
$435.2 billion in 2009, a fall of more than a
third from $667.1 billion in 2008. It expects
them to surge to $721.6 billion this year.
Private capital fled recession-hit emerging
economies in Europe, which saw flows fall
from $267.4 billion in 2008 to a mere $20.3 billion last year. Flows of official funds,
mainly money from multilateral institutions like the IMF, increased by more than
50% but could make up only a little of the slack. By contrast, private flows to fast-
growing emerging economies in Asia went up last year, by 44% to $236.3 billion.
They are expected to rise further in 2010
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Emerging economies to drive global recovery in 2010
Emerging market economies having large domestic markets and ample savings will
continue to power the global economic recovery in 2010 The economic revival, which
is gaining steam, is led by policy-driven domestic demand in the emerging economies
of Asia and LatinAmerica, "For the first time in modern history, the developing world
particularly China, India and Brazil has supplanted the US in leading the world out of
recession "the agency said in a report today.
Noting that emerging economies with big domestic markets and ample savings would
continue to be the main drivers of the global recovery, the report said investment in
infrastructure would remain important in these markets. "Governments and central
banks around the world have spent more than USD 11 trillion to support the financial
sector and about USD 6trillion on fiscal stimulus programs,"
In the absence of these measures, private demand would have collapsed, and the
resulting social and economic costs would have been even greater. "However, costly
fiscal stimulus measures and bank bailouts, combined with lower revenues, have
rapidly eroded public finances, threatening longer-term fiscal sustainability in some
countries," it added.
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Bibliography
www. mapof India.com/India-as-emerging.market
en.wikipedia.org/wiki/Emerging_markets
www.emergingmarkets.org
www.ft.com/indepth/bric
www.euractiv.com/emerging-economies