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THINKING OUTSIDE THE BOX
…WHY INVESTING IN EMERGING MARKETS IS A MORAL IMPERATIVE THAT MAKES BUSINESS SENSE

…How much is Too Much?

he worlds population is set to hit 6,5 billion people soon and there’s no saying how many people would be on earth before some of us depart for eternity – the best experts can do is to make forecasts based on demographic growth trend. Imagine if the same approach is applied to predicting long-term economic growth prospects and development trend around the world, it is hard to imagine how far human society could improve. In my opinion, a groundbreaking attempt in visualizing where the world is heading was the report by the London office of Goldman Sach’s (a global investment banking house). They coined the acronym BRIC (Brazil, Russia, India and China) and forecasted that by 2050, China will overtake the United States as the dominant economy - the top-twenty list is replete with economies/countries considered poor by today’s standard – India, Indonesia, Vietnam, Mexico, Nigeria, Egypt, etc.

Already there is a growing evidence of a shift in global power as shown by investments by emerging market companies constituting a major factor in global commerce according to a report by United Nations Conference on Trade and Development (UNCTAD). Based on the report, investments into developing countries have since doubled within the last two years from a low of $175 billion in 2003. Most of it is attributed to inflows from larger and more prosperous emerging countries. If you look at Africa for example, nearly a third (28%) of its foreign direct investment (FDI) flow comes from other developing countries, which is twice the world average.

According to recent World Bank report (Global Economic Prospects – 2007), the global economy is poised to grow from $35 trillion in 2005 to over $72 trillion by 2030. Needless to say that most of that growth will be attributed to developing/emerging countries in Asia, Africa and Latin America as their share of world economic output continues to accelerate.

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…Everyone Deserves Better
As the saying goes, what goes around comes around; time will prove that no society or nation has an exclusive right to economic advancement and nothing is as constant as change. If offered an opportunity most people are capable of improving their lots. Over the last few years there seem to be a growing consensus that poverty could be radically combated and made history on a global scale and experience of China and India is showing that even poor people crave, indeed deserve the same better life like in advanced societies. The route toward that are investment, business opportunities and market access by people living in emerging economies.

The word “emerging” in this essay is used in the broadest sense to encompass both developing economies as well as communities/enclaves within developed countries, that haven’t quite experienced or adequately benefited from the affluence sweeping through those societies. United States is a case in point; where recent statistics reveal a widening gap in real wages accompanied with falling standard of living that is endangering the lower to middle class. My gut feeing tells me and a preponderance of evidence supports the assertion that a new world of untapped potentials in poor countries and depressed communities could be unleashed in coming decades. You only need to look back the last 50 years to see how major strides in power generation, rail/air transportation, information technology, free-trade and capital-flow have opened up new markets in backward sections of the globe. Going by World Bank forecast, the number of poor people living on less than $1 a day is poised to drop by half from 1,1 billion today to 550 by 2030. Notably, global productivity and quality of life have witnessed an unprecedented surge over the last few decades. Average income in the next 25 years according to the World Bank will grow even faster than during 1980-2005.

…Shifting Center of Gravity
Newly industrializing countries in Africa, Eastern Europe, Asia and Latin America will be the growth drivers in coming years as prognoses indicate, within those markets lay untapped potentials. Various policies by respective countries have given rise to pockets of new prospects. Voting rights bill and affirmative action in the 1960s, as well as favorable government policies targeted toward minority and small business owners in the U.S for instance culminated in the rapid growth of Small and Medium Enterprises (SME) that creates millions of jobs.

Unprecedented economic expansion that stretched for newly eight years during late 1990s to early 2000 resulted in drastic drop in crime rate across the U.S. Average national home ownership rate climbed to 68%, while median income reached $45,000 over that period. Thus far, federal census figures suggest that expansion pace for disadvantaged black and Hispanic businesses outstrips the national average, growing at double-digit rate.

This analogy could be extrapolated and amplified on a global scale; already through disciplined reform efforts, some countries in Eastern Europe, Asia, Africa and Latin America have set on the path of rapid economic expansion boosting the ranks of the international economy. Statistics reveal that over one billion consumers have since joined the global marketplace in the last decade as income level and quality of life improve, thanks to rapid transformation in Russia, Eastern Europe, China and India.

The logical conclusion to discern from this experience is that necessary stimuli; be it in form of debt relief, institutional reform, stable commodity prices, fair trade, increased capital flow, domestic financial incentives, etcetera can truly benefit the generality of populace in a given country and the global community in the long-run. Business is nonetheless a charitable endeavor, therefore prior to delving into the uncharted waters of emerging or depressed markets it is inevitable that companies do their homework.

Ample risks exist in every new market environment, which could inhibit the ability to operate successfully. However some emerging markets have been known to possess major attributes that make them extremely attractive. At the end of the day it’s a question of making strategic cost-benefit analysis that stretches beyond your comfort zone. For one, companies/entrepreneurs must constantly strive to uncover new grounds rather than rest on their laurels or else they will soon become extinct. For companies looking to scale higher altitudes in sectors like natural resources, technology outsourcing, telecommunication, low-cost manufacturing, consumer goods/services retailing, infrastructure development and the like, some of the emerging countries present stupendous growth prospects that are impossible to ignore, as reflected in the colossal volume of potential consumers and resources – China is estimated to have more mobile phone users than the whole of US population, India’s middle class is almost equivalent to the total population of Western European, while phone subscription in Nigeria grew from less than 700,000 to over 25 million within 5 years (2001-2006), according to published data.

When developed markets mature and hit saturation point, there will simply be no alternative than to expand and seek opportunities in these new markets within or abroad; doing that sooner than later will be a wise choice indeed. To quote the World Bank report:

“Globalization is likely to bring benefits to many, by 2030, 1,2 billion people in developing countries (15% of world’s population) will belong to the “ global middle class”, up from 400 million today. This group will have purchasing power of between $4000 and $17,000 per capita and will enjoy access to international travel, purchase automobiles and other advanced consumer durables, attain international levels of education and play a major role in shaping policies and institutions in their own countries and the world economy” (Global Economic Prospects 2007, Managing the Next Wave of Globalization).

…Global Symbiotic Relationship
The bottom-line is as follows; more investments in emerging markets translates to less poverty/social tension (both internally and across borders) and profit for the investors. Income level rises amongst consumers in emerging countries, who increasingly would afford manufactured goods produced/exported by developed countries. Reverse capital flow from such emerging countries/companies also helps support the economies of developed countries – thanks to their huge external reserves, South East Asian countries (China, Korea, Taiwan) as well as OPEC countries (Saudi Arabia, UAE, Kuwait, Nigeria, Venezuela) constitute major investors in US/Western European capital/money market.

There are two sides to this phenomenon. Undoubtedly, the onus for taking advantage of improving global conditions lie on the shoulder of decision-markers in individual countries and organizations; who must take bold steps to tear down regulatory barriers, modernize business environment and face reality. Conversely, in situation where certain countries have long monopolized the reins of opportunities and deprived others of fair access, the result had often led to fierce battle and autarky by counter-parties such as attempts by China or Russia to advance their self-interest at all cost or the lack of consensus on agricultural subsidy in world trade talks.

Charting a level playing field whether within WTO or other multilateral institutions is not only an ethical issue but also an economic imperative that will expand trade volume, stimulate investments and bolster global commerce, thereby serving the interest of all players on the face of this earth in the long run. The United States and Western Europe for instance as major economic and technological forces carry a huge burden of ensuring that they lead by example.

After all, as nations bicker over trade policies, have we pondered to imagine what could have been without a coherent global market arena, as we know it today? The place would have been a jungle to everyone’s utter detriment. Historically Western Europe and the United States have had a leading edge, but in today’s dispensation the landscape is unavoidably changing as more countries awaken to opportunities and strive to tackle pressing economic and socio-political problems at home. There has to be a way of aligning the market with these disparate interests, including that of new players on the block. There’s an old adage popularized by President John F. Kennedy that “a rising tide lifts all boats” and this truly reflects reality of any growing economic system.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.