Chapter 11: The Age of Emerging Markets
By 2050 the big economies will no longer be emerging, and the emerging economies will no longer be very big
FORTY YEARS AGO, “emerging markets” did not exist. The phrase, now ubiquitous, did not appear until 1981. It was coined by Antoine van Agtmael, an official at the International Finance Corporation, a division of the World Bank. He was looking for a more enticing title for his Third World Equity Fund, a name, he said, that evoked images of “flimsy polyester, cheap toys, rampant corruption, Sovietstyle tractors and flooded rice paddies”. Such images were not easy to dislodge from the minds of Western investors, whose horizons once extended little beyond their own shores. In his earlier job at Bankers Trust Company in the 1970s, van Agtmael recalls, his boss told him, “There are no markets outside the United States!”
His boss was wrong, of course, but not that wrong. In 1970 Deng Xiaoping, the champion of China’s economic reforms, was still in exile. India’s prime minister, Indira Gandhi, had turned to high socialism a few years before (nationalising the banks and throttling big business) and would turn away from democracy a few years later. Vietnam was still at war. The “Chicago Boys”, liberalizing technocrats schooled by Chicago economists like Arnold Harberger and Milton Friedman, had yet to gain influence in Chile, which had just elected a socialist president, Salvador Allende, who believed the economy could be centrally planned with the help of a Burroughs 3500 computer.
If Western investors were sceptical about the “third world”, it was also suspicious of them. In the 1970s developing countries equated capitalism with exploitation and dependency. They lamented the declining price of their commodity exports and the lingering influence of foreign multinationals, which they regarded as relics of colonialism. At the United Nations Conference on Trade and Development (UNCTAD) in Geneva, they demanded a “new international economic order” that would better serve their interests.
Forty years later, a new order has taken shape, but one very different from that espoused in the 1970s. Developing countries have made their peace with capitalism. They now seek to attract foreign investment, not to expropriate it, and to entice Western consumers with competitive manufactured goods, not to squeeze Western importers with commodity cartels. Their policymakers promote their interests not at the left-leaning UNCTAD in Geneva, but 1,200 metres higher up in Davos, a Swiss ski resort where the World Economic Forum holds its annual capitalist jamboree of the great and the good in business, politics and the media.
Over the past 40 years, “emerging markets” (EMs) have entered the language and the portfolios of world investors. They are likely to attract over $1 trillion of private capital from abroad in 2011, according to the Institute of International Finance, which represents international bankers. Emerging and developing economies accounted for a third of world GDP in 2010, measured at market exchange rates, and almost a half when rates are adjusted for national differences in purchasing power. They contributed an even bigger share – two-thirds – of the growth of global GDP that year.