Emerging Economies

History of Economic Development

Birth of Capitalism Starting with the 11th century long distance trading

flourished connecting thriving pockets of growth.

However, by and large, living standards remained at subsistence levels for the majority of the world's population until the middle of the 18th century.

Over the centuries as commerce grew, albeit slowly, the power of the vassals of the feudal system declined and was replaced by merchants and incipient capitalists.

Innovations in sailing led to long distance trading.

This lead to creation of institutions which facilitated the growth of the modern capitalist system.

Birth of Capitalism – Why the West The Protestant Reformation - Protestant work ethic -

fostered hard work, frugality, sobriety and efficiency, virtues which facilitated capitalism.

Rise of strong nation states - created conditions conducive to capitalism (uniform monetary system, contract and property laws, police and militia protection, as well as, basic transportation and communications infrastructure)

The Enlightenment - during the 17th and 18th century there were great scientific and social advances.

Social thought as expounded by David Hume, Adam Smith and Thomas Jefferson stressed the rights and responsibilities of the individual.

Capitalism and Colonization Capitalism as an economic system spread beyond Europe,

mainly to North America and Australia. Descendants of the English and French colonists grew in number and with new immigrant waves, primarily from Europe.

However, in Africa, the Indian Subcontinent, East Asia, and in Latin America the indigenous peoples were relatively numerous.

The colonist created an administrative structure, which encouraged or more likely coerced, the indigenous peoples to produce primary products for export to the home countries.

These primary products were then transformed in the production process into manufactured goods, some of which were re-exported back to the colonies. Under these conditions there was little incentive to create new industries in these colonies.

Understanding Emerging Economies

Emerging Economies

Restructuring economies along market-oriented lines.

Offer wealth of opportunities in trade, technology transfers and FDI.

Five biggest emerging markets are China, India, Indonesia, Brazil and Russia

Other countries also considered as emerging markets - Mexico, Argentina, South Africa, Poland, Turkey, and South Korea

Why ‘Emerging’?

Regional economic powerhouses with large populations, large resource bases, and large markets.

Transitional societies that are undertaking domestic economic and political reforms by adopting open door policies to replace their traditional state interventionist policies that failed to produce sustainable economic growth.

World's fastest growing economies, contributing to a great deal of the world's explosive growth of trade.

Five biggest emerging markets' share of world output will double to 16.1 percent by 2020 from 7.8 percent in 1992.

Critical participants in the world's major political, economic, and social affairs.

What made them emerge?

Two potential causes for the creation of emerging markets: Failure of state-led economic development Need for capital investment.

Failure of state-led economic development

Failed to produce sustainable growth in the traditional developing countries.

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.

What made developing countries emerge?Need for capital investment. Desperately needed capital to finance their development, but the

traditional government borrowing failed to fuel the development process.

Borrowing either from commercial banks or from foreign governments and multilateral lenders like the IMF and the Word Bank often resulting in heavy debt overload leading to a severe economic imbalance.

Inability to manage and efficiently operate the borrowed funds to support economic growth.

Due to unsatisfactory results of government borrowings, developing countries began to rely on equity investment as a means of financing economic growth.

To attract equity investments, a developing country has to establish the preconditions of a market economy and create a business climate that meets the expectations of foreign investors.

The change in financing sources thus became another factor leading to the rise of emerging markets.

What has changed?

Foreign Investment vs. Foreign Assistance

Trade and capital flows are directed more toward new market opportunities, and less by political consideration.

Increasing two-way trade and capital flows between emerging markets and industrialized countries reflecting the transition from dependency to global interdependency.

Accelerated information exchange integrating emerging markets into the global market at a faster pace.

Trends

Source: International Monetary Fund, World Economic Outlook Database

Projected Growth

Ref: www.pwc.com

Challenges & Opportunities in Emerging Economies

Opportunities in Emerging Economies

Burgeoning middle class & rapidly growing consumer base

Gradual shift in high value purchase segment

Science and Technology in the BRICs

Better trade opportunities - Comparative advantage

Challenges in Emerging Economies

Continuing global crisis

Low ease of doing business

High Level of corruption in a country’s government

High levels of poverty and social conflict

Diminishing returns to capital investments

Slowdown in rate of progress at the technological frontier

Greater protectionism leading to slow catch up rates

Natural resource constraints on sustainable long-term growth

World's largest democracy 3rd largest economy on Purchasing Power Parity basis Spending on personal products and services to grow six-fold, healthcare

spending eightfold, spending on transportation tenfold Forecasted Indian GDP growth to top $5 trillion by 2020 Higher saving and investment rates Private consumption projected to quadruple by 2025 Favorable demographics - 52% people below 25 years, 50% of the

population in 15-64 age bracket , Median age will remain 30 even as late as in 2025

Highly English conversant population Large pool of young skilled labor force, cost effective production facilities

and large domestic market Diverse industrial base Capacity upgradation in infrastructure, industrial base and intellectual

capital Progressive tax reforms Liberal portfolio investment regime Acceleration of the privatization process and restructuring of public

enterprises A Flourishing base for research and development activities

Opportunities in Indian Economy

Foreign Investment Restrictions in several sectors

Inadequate Infrastructure

Implementation and Enforcement of Intellectual Property

Corruption

Delays in Courts

Labor and Employment

Business Challenges in Indian Economy

The Road AheadRelative Size of G7 and Emerging economies

G7 and E7 Growth Path in PPP Terms

Relative GDP 2050