Page 45 - STRATEGY Magazine

vestors have confidence in the rule of law and their property rights. Equally general is the observation that many emerging markets rank low in these areas; instead, businesspeople who want to work legally in developing na- tions are often subject to thousands of hours of paperwork and the capricious whims of bureaucrats. Even a minor improvement in the legal structure can have a dramatic influence on GDP in a country like Indonesia, and right now, just that is happening. GDP growth of more than 5 percent is expected through 2019, a trend attributed to revised business regulations and liber- alization of foreign direct investment.
METALS ARE HOT
Economic recoveries from Russia to Nigeria have rising metal prices to thank for their sudden resurgence. As China continues to expand its global presence through the “One Belt, One Road” project that will link consumers across Asia to its manufacturing cen- ters, everything from copper to nickel is in high demand. Overall, metals are set to rise by 16 percent in 2017, mak- ing the sector attractive to investors in nations from the Democratic Republic of Congo to Brazil and Guinea to Peru.
MACRO TRENDS, MICRO DETAILS
There is a specter hanging over emerg- ing economies—the shadow of protec- tionism. After championing free trade for decades, the United States has elected a president who doubts that globalization is good for his country. Similar rhetoric has rung out in parlia- ments all over Europe. If these voices win out, value chains that currently provide much-needed employment for poor and middle-class workers in developing nations could disappear overnight. Thus, even as the IMF and World Bank see the United States’ resurgent economy buoyed by dereg- ulation and corporate tax cuts, feed- ing commodity exporters with highly desirable cash, the long-term effects of the Trump presidency are still un- known.
This point highlights a simple fact— emerging markets are highly depen-
does not only constrain the actions of advanced economies; it also compels developing nations to liberalize their business laws. Capitalism has worked
Mexico’s unbundling of its elec- tricity monopoly, CFE, has drawn billions of dollars of investment into generation projects in the last four years.
dent on external phenomena. Just as the geopolitical status of a country like the Czech Republic may be de- termined more by the U.S. elections than by any local initiatives,
so too will markets in Georgia and Ukraine depend on their bigger neighbor (Russia) for much of their growth. Inves- tors looking to capitalize on re- newables in Mexico or copper in Poland should keep these larger trends in mind; often- times the risks that cannot be quantified pose the greatest threat.
Of course, keeping abreast
of macro trends is not enough. Every market is unique, which is why a coun- try like Papua New Guinea might not reap the benefits of high metal prices despite its large deposits of gold, nick- el, and copper. In that specific case, bottlenecks have stymied local produc- tion. Then, of course, there is the issue of conflict, which threatens to derail growth in South Sudan, for instance. Even as supply chains crisscross na- tional boundaries, national govern- ments continue to play a large role in local economies. But will this always be the case?
LOOKING AHEAD
While it is obvious that developing economies depend on global cash flows, even rich nations now need interna- tional value chains, a fact that may ex- plain why Trump has softened his pro- tectionist rhetoric after taking on the responsibilities of office. The United States stands to lose five million jobs if NAFTA is renegotiated—just one ex- ample of a free trade agreement that has transformed entire sectors in each nation that is party to it. While eco- nomic realities may be politically un- popular, the power of comparative ad- vantage will only continue to disperse production chains across continents as communication and transportation technologies become more efficient. Simply put, the role of emerging econ- omies is too integrated into the world order for developed nations to then re- verse course. The force of globalization
for developed nations because it allows ordinary people to start businesses and attract investors without undue hassle, yet in a nation like Egypt, it can take more than half a year of wrangling with government agencies to receive legal permission to start a small business. Thus, many developing economies have giant informal sectors with severely limited opportunities to attract capital. This is gradually changing, however. For example, In- donesia recently created a single form that businesspeople can use to obtain a company registration certificate and trading license. It also eliminated a minimal capital requirement for small and medium-sized enterprises. As Ro- drigo Chaves, the World Bank Coun- try Director for Indonesia, put it, “It is encouraging to the global business community and local entrepreneurs alike to see the process of conducting business simplified.”
In his recently published book, The Great Convergence, Richard Baldwin argues that after 200 years of diver- gence between rich and poor nations, the last four decades have seen remark- able convergence, that is, developing nations have been growing faster than developed ones. While economics is a value-free science, it is not too much of a stretch to say that this is a good thing—one hopes that at some point in the not too distant future, people in all countries will have access to the same quality of life enjoyed by those in ad- vanced nations.
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