What Is An Emerging Market?
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Emerging markets countries have much larger impact in the world economy. Because of fast growing in economies and most countries of the world are emerging economies. In this paper, China, India, and Brazil are used to represent emerging markets countries. Since they have significant characteristics and are the largest emerging markets. They are the fastest-growing economies within their relative regions and also in the world. The countries have contributed to the majority of world GDP growth. They also have similarity in terms of large size of population. Their population account for almost three billion people, in other words, around 40 percent of total population of the world. In 2011, China, Brazil, and India were respectively the world's second, sixth, and tenth largest economy in terms of GDP according to the World Bank.
What is an Emerging Markets?
At first, the term Emerging Markets was used to describe markets outside of the developed countries. However, not all countries outside of the developed world can be termed emerging economies. There is an unclear classification between emerging markets, developing, and underdeveloped countries (Kvint, 2009). Due to many characteristics are shared between emerging markets and developing countries such as large agricultural sectors, disparities between rural and urban areas, poor infrastructure, and low productivity (Enderwick, 2007).
The term Emerging markets is generally used to define countries with low income levels; the World Bank define emerging markets country as a country has a Gross National Income (GNI) per capita less than USD 9,000; and having the potential for development or experincing rapid growth of economy. However, emerging markets countries still face some substantial political, economic, and market specific risks (Enderwick, 2007; Kvint, 2009).
Characteristics of Emerging Market
Emerging markets countries share many of characteristics. Major characteristics are found mainly in economic term and some are found in political and technological characteristics.
In terms of economy, emerging markets countries have high growth rate of economy. However, their growth rates have shown significant fluctuations. China and India have grown rapidly over the last decade, more than 8 percent annual growth rate of GDP. While Brazil's GDP growth rate was fluctuated, between -0.3% and 7.5%, over the same period. China and India have the same trend of the GDP growth rate. The growth rates increased gradually between 2002 and 2006, and peaked in 2007 before fell deeply in 2008 according to the World Bank, due to the effect of the global crisis.
Furthermore, the emerging economies have potential to growing more and more. China, Brazil, and India have large domestic market and large labor force. Brazil's major GDP contribution is in service sectors. The country also has large agricultural areas with wide range of climate zones. Brazil also has abundance of natural resources and well-developed industrial sectors (Lattimore and Kowalski, 2008). In both China and India, GDP contributed by agricultural sectors has been decreasing but its place has been replaced by industrial sectors in China and by services sectors in India. China's role as the manufacturing workshop of the world. Since its large size of population is a growth stimulus. So China has a very large labor force to draw into high productivity manufacturing (Greene, Tsai, and Lattimore, 2008). While India performs well in services. In the case of India, more than half of the labor force is in agriculture but the major source of economic growth is services sector (Eichengreen, Gupta, and Kumar, 2010).
In addition, investments in emerging markets have possibility of a high rates of return for investors. Because their strategies focus on economic driven by exports more than domestic consumption. This makes the demand in domestic market is low, so they can produce low cost products for the advanced economies (Amadeo, n.d.). Also, labor costs in these markets are much cheaper than in the developed countries. For example, labor costs in German car plant are approximately fifty times higher than in China. Wage levels of software engineers in the United States are around five to six times more than in Bangalore, India (Enderwick, 2007).
On the other hand, the rapid growth is often accompanied by high level of risks. These include high inflation rates, financial crisis, and high disparities between urban and rural areas. Typically, high inflation in emerging economies is produced by continuous depreciation of exchange rate due to high fiscal deficits (Montiel, 2003). In 2011, according to the World Bank inflation rates accounted for 5.4% in China, 6.6% in Brazil, and 8.9% in India.
For financial crisis in emerging markets, India faced near crisis twice in the 1990s. In 1991, India experienced a classical external payments crisis when the country was affected by two immediate external shocks. First, the Gulf crisis in 1990 which makes petrolium import costs increased by half. The second shock is global recession, the export markets for India had worsened which causes India's export grew only 4 percent in that year. Another is the 1997 crisis but, this time, India was much less vulnerable compared to the 1991 crisis and to most East Asian countries (Gosh, 2006). While Brazil suffered from the 1997 crisis. Since the country maintained high interest rates to attract investors result in a massive inflow of volatile capital and increasing Brazil's vulnerability to external financial problems (Campodonica and Chiribigo, 2000). In addition, Brazil was severely hit by the financial crisis again in 2008. Brazil faced two financial problems which are capital flight from stock market and decreasing in the domestic supply of credit, and the reduction in exports (Sobreira and De Paula, 2010).
Moreover the rapid growth in emerging markets are not enjoyed universally. Most of them confront disparities between urban and rural areas. The faster growth and higher income in the urban areas motivates people to flock to the cities and modernized areas (Panagariya, 2008). In China, there are huge disparities between the rapid growth in eastern coastal provinces and rural areas in western regions. More than one third of total population live in the urban areas. The coastal areas produce 60 percent of China's GDP and 85 percent of GDP growth (World Bank, n.d.). Similarly, India has rapid growth in just four of fourteen major states. India's urban areas make more than two third contribution to the country's GDP and account for 90% of government revenues (World Bank, 2007). In the case of Brazil, 80% of the country's population live in cities but there are still some rural societies in the southern plains and forests, and in the north eastern regions. The two largest urban cities are Sao Paulo and Rio de Janeiro which account for about 20 million and 10 million population respectively.
Both China and India share another economic characteristic which is their reliance on migrant remittance inflows. Both are the two largest recipient in terms of remittance inflows with each account for around USD 50 billion in 2010.
Science and Technological development
The emerging markets countries have limited investment in technological development. However, China, India, and Brazil have dramatic increase in science research investments and science publications. China is the second largest country in terms of R&D spending. In 2010, China's Gross Domestic Expenditure on R&D or GERD was 1.77 percent of GDP, in other words, China spending about USD 179 billion on research and development. While Brazil's GERD was 1.08 percent of GDP in 2008 and India's GERD was 0.76 percent in 2007 (Organisation for Economy Cooperation and Development, 2012). For measurement by researchers in R&D per million people, in 2008, China has 1,199 researchers and Brazil has 696 researchers which are considered low if compared with the United States that has more than 4,000 researchers per million people. In the case of high technology exports, China is the largest exporter with around USD 406 billion or 28 percent of manufactured exports in 2010. In the same year Brazil exports 11 percent and just 7 percent of manufactured exports for India.
Political conditions is one of the most important risks among the emerging economies. One of the political conditions is political instability. The differences in political systems can cause the differences in economic growth. Both Brazil's and India's political system are vibrant democracy but the political risk of both countries is low for this moment. On the other hand, the political risk in China seem to be high due to the social and political conflicts, even though the Communist Party dominates and maintains a monopoly political power in China (Tsanis, 2012). However, China have benefits from communism by quick movement of policy implementation and ability to direct resources.
Economic reform is one type of political risk. Many emerging markets liberalized their business environment and removed many of restrictions. Liberization creates new oppotunities for international investors, result in increasing foreign direct investment. The investors who move early face high risks of unpredictable change. These risks occur when other institutional reforms fail to keep pace with the economic reforms (Enderwick, 2007).
Furthermore, high volatility is another characteristics of emerging markets. The high volatility of emerging market are found to be association with domestic events rather than global events. This volatility can come from natural disasters, domestic policy instability, and other specific local events. The most volatile period in Brazil is related to hyperinflation in Latin America. In India's case, the stock market scandal caused volatile period (Aggarwal, Inclan, and Leal, 1999).
Emerging markets countries are growing rapidly. More and more emerging economies will overtake the advanced economies countries and step up to top rank in terms of the biggest economies. Nowadays, large emerging markets - China, India, and Brazil - become top ten economies measured by GDP. Also, in the future, the countries will overtake the advanced economies and will become the world's leader in economy. Emerging economies countries are larger force in the world economy, although they still face many challenges to achieve sustainable growth. Cooperation among emerging markets is another key factor to make the countries be engine of growth in the world economy.
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