Jim O'Neill, the former Goldman Sachs Asset Management Chairman formulated the acronym BRIC in 2001, to signify a group of economies consisting of Brazil, Russia, India and China which were the fastest-growing countries in the world at that point. These came to be termed as emerging market economies. Subsequently South Africa was added to make it the BRICS. Other such acronyms (not as popular though) too were formulated, namely, MINT for Mexico, Indonesia, Nigeria and Turkey. These economies showed favorable demographics and economic prospects over the next 20 years. MIST (Mexico, Indonesia, South Africa and Turkey) is yet another grouping which is poised for explosive growth. Then there are the Eagles- Emerging and Growth Leading Economies, consisting of, Brazil, China, India, Indonesia, Mexico, Russia and Turkey. The EAGLE economies are expected to lead global growth, provide important opportunities for investors and these countries’ expected contribution to world economic growth in the next ten years is expected to be larger than the average of the G6 economies. On the flip side a grouping termed as Fragile Five (Brazil, India, Indonesia, Turkey and South Africa) too exists indicating economies where investors should steer clear off.
Characteristics of emerging-market countries are that they are fast growing economies, have a large and burgeoning middle class, huge investments in infrastructure, increasing trend in international trade, attractive FDI destinations, stable political climate and a conducive policy climate that results in profitability for the investor. In the post-2008 financial crisis period and in the subsequent Great Recession, the emerging markets have proved to be the most resilient, measured by GDP and trade volumes. Economic progress in emerging markets has been taking place at an accelerated pace partly due to advances in technology, sound economic policymaking, and reduction in poverty as a result of health, education, and other social reforms. During 1996-2010, emerging economies grew at more than twice the rate of developed countries—about five percent versus two percent annual GDP growth, respectively. Even more impressive is that, recently, income disparity between certain emerging markets and developed markets is declining rapidly.
In the very recent period this scenario has been changing and the IMF has signaled a warning about financial problems in these economies. There are fears about a possible asset bubble due to excessive capital flow into these markets. Apart from that the inflationary pressure is increasing what with the inflation in most countries being well above the Central Bank’s target. There are particularly concerns regarding food and energy price rise leading to an inflationary spiral that will be difficult to stem. Moreover some economies are experiencing a credit boom and the same could fuel the inflationary situation. A need for monetary tightening in the circumstances seems inevitable. A fall in the growth rate will then be the resultant outcome.
The tapering by the Fed is yet another concern for emerging markets. Ever since the U.S. Federal Reserve announced its intent to reduce its bond-buying program, investors have fled emerging-markets assets. The slowdown of the Chinese economy and China’s ‘blood change’ amongst the current regime and positive projection for developed economies contributed to the flight. Some emerging market economies have seen investors shying away from them. In the case of countries such as Argentina, Turkey, Ukraine and South Africa investors who are cynical about the capability of authorities to avoid an economic turmoil. There are analysts who suggest that investors must do their due diligence and examine each country for its strengths and weaknesses rather than group them as emerging economies.
Another issue which of has proved a particular impediment to Foreign Direct Investment has been the persistence of confirmation bias, especially in the business media and amongst financial analysts and policy advisors. The fifty four countries of Africa are routinely lumped together and stigmatized as high risk, with little or no real understanding of the current business dynamic or market potential. It would appear that preconceptions and misconceptions are never very far away when it comes to issues appertaining to emerging economies.
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