The emerging markets: exploring the consequences

The rapid development of countries like China and India is a remarkable

Vince Cable

phenomenon, says Vince Cable, the UK’s Secretary of State for Business, Innovation and Skills. “In a matter of one generation, China has broken through to a degree that took over a century in Britain. Solidly established precedents like South Korea show that this breakthrough can be sustained. It is clear that major so-called emerging markets have already emerged.”

Speaking at The Economist’s Emerging Markets Summit here recently, Cable said western companies and governments have welcomed emerging market growth and view it as an investment and trade opportunity. In addition, by maintaining open markets, western countries are helping to sustain rapid progress in alleviating poverty. Yet there are growing undercurrents of disquiet about competition across a wide range of goods which have pushed down wages and sapped the willingness and ability of governments to maintain open, liberalised economies.

“The dilemma emerging is this: the free movement of goods, services, capital and - more controversially - people has brought, and will bring, great economic benefits. But there are growing perceptions of, and some actual, conflicts of interest,” Cable says. “To manage these and to maintain the momentum behind globalisation requires cooperative solutions – to manage disputes over trade and investment, environmental damage and mass migration, and much else.”

Cable reminded western economies that economic nationalism will not help sustained recovery and will be counter-productive. “A return to protectionism is not the way forward. Globalisation is not a zero-sum game.”

Loic Sadoulet

Loic Sadoulet, an Affiliate Professor of Economics at INSEAD and Academic Director of the INSEAD Africa Initiative says the rest of the world has to learn to be as competitive as China (and other emerging markets) -- not in terms of producing the same goods but new ideas, going higher in the value chain perhaps, or breaching barriers to efficiency.

“The issue is how much are we transforming?” asks Sadoulet. “New actors are coming in and protectionism keeps companies artificially protected from competition. It’s like protecting your child because he is not big enough to go out and play with the big boys outside. But if you keep the child shielded at home, the child will never be able to go and play with the big boys. You need to encourage entrepreneurship and do things better, rather than say: ‘Let’s block the whole system because they are playing unfairly.’”

What’s in a name?

In recent years countries and economies have been informally grouped together, such as the BRICs (Brazil, Russia, India and China); the ‘Next 11’ (N11) markets and the ‘E7’ grouping of fast-growing emerging markets - the BRICs plus Mexico, Indonesia and Turkey. The Economist recently came up with the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), six economies beyond the BRICs that it believes will most likely deliver sustained high growth over the long term.

But do these acronyms mean anything more than just groupings of economies which are used by economists to compare growth rates? Absolutely, says Mauricio Rodríguez Múnera, Colombia’s Ambassador to the UK. “The acronym has substance because they are a set of demanding criteria that the country has to fulfil in order to be part of that list -- you have to grow at a pace two or three times faster than the rest of the world; a large, young population; strong democracy; solid institutions; political stability; and sound fiscal management. So there’s a lot of support for the inclusion of a country into CIVETS.”

He believes that the kind of analysis and research that went into selecting the countries is helpful for the business community, as well as for the countries, to see how they fare in relation to other countries in competitiveness and attractiveness for foreign and local investments.

Sadoulet says big companies are starting to emerge from what used to be the Third World and are now the new competitors in the global market. These companies are doing very well in many ways “because they have turned the innovation cycle on its head.” They are adapting productive assets and matching them to emerging market needs, and have the ability to operate in an environment that’s somewhat more volatile and different.

“These companies, which are in countries which have - or had - bad distribution systems, pollutions, inefficient government, social issues, are growing up,” says Sadoulet. “They are saying, ‘Hang on, we are good at tapping these markets. Can we go into other emerging markets? How can we actually be efficient?’ So you see companies with very good investment strategies pushing themselves to really innovate.”

Consumer trends

Ahmet Bozer, President of Coca-Cola Eurasia and Africa,

Ahmet Bozer

told INSEAD Knowledge that the dynamics of a young population, urbanisation, and a growing middle class are offering significant opportunities to companies. Because Coca-Cola’s products are for people from all walks of life, higher populations of people moving into middle class gives the company significant opportunities and a favourable business landscape.

However, this is not the only benefit that is offered by the emerging markets. Bozer sees a lot of opportunities with innovations coming out of these markets and significant successful partnerships with local people. “We are seeing opportunities to leverage the entrepreneurial spirit of these people in these countries. One example is the micro-distribution centres that we have throughout Africa. There are about 3,000 of them -- so we are talking about 3,000 entrepreneurs setting up businesses, which (represent) a very significant route to markets on the continent. When you look at the macro-forces to our business model, you are seeing a very favourable business landscape for our business in emerging markets.”

When it comes to consumer trends, Bozer says that we tend to think of differences between emerging markets and developed markets, adding that we should perhaps give greater weight to the similarities and commonalities.

“In many countries we see innovation modernising the local taste in ways that make people proud of their local roots but at the same time make them feel connected to the world by using the universal brand,” says Bozer.

He also sees trends developing in emerging markets on issues such as sustainability, and healthy and active lifestyles. “In Africa, for example, you hear about stewardship of water which is a very important concern, not just for that state but also for the consumer. Those sustainability trends are very real in the minds of the consumers. So what you see around the world in consumer trends, you also see in the emerging markets with different accents. As companies, we need to be well aware of that.”

Leapfrogging

Processes are becoming easier because of technology, the integration of markets, and access to information, so things are moving fast with countries able to leapfrog previous generations of products and services, Sadoulet told INSEAD Knowledge. “In Kenya, people (who’ve never had landlines) now pay each other by mobile phone. And Kenya has 11 million users. There are 300 million euros of transactions per month and they handle more payments in Kenya every day than Western Union does worldwide. They are doing it in Tanzania, Afghanistan and they’re rolling it out in South Africa. Yet here in France, I still don’t see this and this is something we really want.”

The Dacia Logan car was developed for countries in Eastern Europe and Africa. Interestingly, it’s the fourth-highest selling car in France, says Sadoulet. “We want some of the products that work, some of the solutions which were developed not with Europe in mind. South Korea is looking at having intelligent cities where information technology transforms life and work in significant and fundamental, rather than incremental, ways. Because there is no incumbent, you can just jump to the latest technology.”

“Consumers are much more connected now and there is a global standard to what the emerging markets want. And if we don’t provide it, then they will provide it themselves,” says Sadoulet. “We’re going to see a lot of different thinking coming from emerging markets.”

The Economist’s Emerging Markets Summit was held in London September 15-16, 2010.