The Economist magazine’s recent survey of globalization includes a discussion of the term “emerging markets.” Here is the story of the origin of the term:
‘The term “emerging markets” dates back to 1981, recalls the man who invented it, Antoine van Agtmael. He was trying to start a “Third-World Equity Fund” to invest in developing-country shares, but his efforts to attract money were being constantly rebuffed. “Racking my brain, at last I came up with a term that sounded more positive and invigorating: emerging markets.”’
In the Economist article, there is some debate on the usefulness of the term. Much of it has to do with taxonomies of levels of development, and the interpretation of “emerging.” The “markets” part of it seems to get neglected. The “markets” are presumably the domestic markets of these economies, which are growing, with increasing buying power of their populations, who need to be served by domestic firms or multinationals. The “markets” are also the stock markets of these economies – the ones in which van Agtmael wanted to interest investors from the already emerged economies. Certainly, these stock markets have seen a lot of action in recent years, and large run ups in values. Growth has spurred these market increases, and the latter have helped fund foreign investment by firms from these economies. Surprisingly, much of what has taken place so far has been without significant developments in the sophistication of the financial markets of these economies.
It seems to me that this is an interesting, and somewhat different, view of “emerging markets” – they can be economies where financial market institutions are developing to modern levels. The problems of the US financial system demonstrate just how primitive some of the legacy institutions of US financial markets are – the financial products being traded got ahead of the institutions for risk assessment and risk management. If I were a policy maker in an emerging economy (read, India) I would look on the present situation as perfect for making inroads into global financial markets, by providing better institutions for analyzing risk and managing risk – “better” includes greater transparency, and lower transaction costs, both of which promote liquidity. I think some very interesting pointers and analysis are in a recent article by Ajay Shah, which compares over the counter trading of derivatives to trading on electronic exchanges. I guess this focus on the business opportunity is an industrial policy twist to financial development or financial sector reform. Certainly, Singapore and Dubai are taking this route in developing financial centers. It would be useful to think about what potential competitive advantages India might have, or might develop.