Why emerging markets are close to entering their golden age

It’s getting close, the age of emerging markets is about to dawn. Investors need to understand why, and then prepare.

Article updated: 24 April 2019 11:00am Author: Michael Baxter

The golden age for emerging markets beckons, I’ll explain why, but first there is a threat to emerging markets too. I’ll deal with that before I get to the reasons to be bullish.

The threat

The threat lies with automation and in time 3D printing, removing the biggest traditional advantage of emerging markets. Their traditional route to growth hinged upon cheap labour as western firms outsourced their manufacturing or contact centres.

India and China have relied on that model. There is a snag; it can only take a country so far — this is what is meant by the middle income trap, an economy gets to a certain point, and then stops.

A phrase has been coined to summarise the plight of some emerging markets — premature deindustrialisation. It describes a phenomenon in which economies shift from manufacturing to services too soon, before the industrial base is given sufficient time to develop. Latin America and Sub Saharan Africa are perhaps the obvious victims of this.

The first six opportunities:

There are seven reasons, but I want to outline six of them first. They each provide a compelling reason to be bullish about emerging markets, but my seventh reason is the pièce de résistance.

  • Number one; low cost or free internet access. New technologies are providing internet connection into remote regions.
  • Low cost smart phones.
  • As a consequence of the two reasons above, education is becoming boosted, as schools around the world can provide access to the best teachers in the world, via the internet. Thanks to the internet, lack of availability of text books, or paper, is no longer an issue.
  • Also, because of the combination of internet access and smart phones, online banking will transform the number of people with access to bank accounts — traditionally seen as a block to economic development. Linked to this has been the emergence of a practice by which electronic payments are made via smartphones, even if the person making the payment does not have a bank account.
  • Renewable energy removes the need to connect remote regions to a national grid. Now energy can be generated locally, and as renewables fall in cost, the benefit to poor regions is already proving to be transformative.
  • Property rights, the economist Hernando De Soto has argued that ambiguously defined property rights has been the main barrier to emerging markets closing the gap on the West. But blockchain can change this, as a record of property ownership is transferred to a distributive ledger controlled by the crowd and no one individual/state, which people don’t trust.

The most important driver

But there is another reason — to an extent the six factors listed above make this other factor possible.

I refer to the way barriers to entry have fallen thanks to technology. In the past, lack of infrastructure held emerging markets back. Today, all you need is a smart phone, internet access, some brains and entrepreneurial cunning.

This is not a profound insight. The corporate world has understood this for some time. That is why companies that are serious about surviving have been busy backing start-ups, via incubators and why digital transformation has become a buzzword.

The implications for emerging markets are not so well understood.

In the era of AI, what you really need is a workforce blessed with an outstanding education in maths. So, that’s Russia, Eastern Europe, and China. These regions are emerging as technology hubs.

As for India — businesses in the country, realising that the outsourcing models are dying, are focusing on becoming experts on automation.

China, in particular, has an advantage, that the West, with its correct concern about human rights and privacy, cannot match.

AI, and its real world application, machine learning, needs data. It’s appetite for data is ferocious. The privacy implications, bringing with it the danger we could descend into an Orwellian state, are real. For once, the EU has been ahead of the game with GDPR. For all its faults, GDPR is an attempt to protect our privacy in a period when we risk descent into a surveillance culture.

Alas, concerns over regulation risks clipping the wings of AI and its development in Europe. The US, does not have the same emphasis on privacy as the EU, but slowly, with California in the vanguard, state by state, the US is moving towards its own versions of GDPR.

China is not so encumbered. This, combined with massive state investment, will give China the edge.

PwC projects that AI will contribute $15.1 trillion a year to the global economy by 2030. It projects that 26 per cent of this amount will accrue to China.

The 2020s will be an outstanding decade for emerging markets, but China will be the biggest beneficiary.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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