Emerging markets

Emerging markets are economies that present high RISK but also potentially high rates of growth; they have low per capita GROSS DOMESTIC PRODUCT (GDP). Economists and investors use a variety of terms to differentiate among economies. In the 1960s, economies were divided among first-, second-, and third-world countries. Considered elitist by many, these terms were replaced with industrialized, newly industrialized (NICs), and developing countries. With increased GLOBALIZATION and the end of cold-war economic barriers, many developing countries are now referred to as emerging markets. In recent years many U.S. mutual fund companies have created emerging-market funds. Emerging markets are predominantly capitalist political/economic systems, with the potential for growth. In addition to relatively low per capita GDP, emerging markets tend to have lower literacy rates, lower life expectancies, and higher infant mortality rates. Most emerging markets also lack INFRASTRUCTURE, roads, ports, and utilities needed for ECONOMIC GROWTH. Emerging markets differ from agrarian economies in that there is the potential for growth. In very low-INCOME countries, the circle of poverty limits the potential for economic growth. Low incomes prevent households from saving. Lack of savings limits INVESTMENT. Lack of investment limits the potential for economic growth. One problem for many emerging markets is the dependence on commodities. Except for hydrocarbon resources, most World Commodity prices have been declining for decades; with declining prices for their exports, emerging markets have lower income. In many emerging markets, people have become the major export, called guest workers in the Middle East and temporary workers in Europe. Throughout the later part of the 20th century, remittances sent home to developing countries from these young men and women working abroad have been a major source of hard-currency income. In his The Stages of Economic Growth, William Rostow describes how economies go through a series of five stages of economic growth: traditional society, preconditions for takeoff, takeoff, drive to maturity, and mass CONSUMPTION. In the traditional society stage, well-established economic and social systems and customs limit economic change and growth. In the preconditions stage, traditional constraints are removed and new methods and technology introduced. In the takeoff stage, an economic growth begins, and investment expands rapidly; this is a period of intensive development. Rostow dated the takeoff stage in the U.S. economy as the period from 1843 to 1860, when major railroad investment opened new markets and expanded access to resources throughout the country. Today many emerging markets are in what Rostow would label the preconditions for take-off. Removal of centrally planned economic systems, creation of STOCK MARKETs, and economic aid to stimulate infrastructure development are all occurring in emerging markets around the world. One source of CAPITAL for emerging markets is MULTINATIONAL CORPORATIONs (MNCs). These are firms that operate in more than one country. The common image of an MNC is a giant CORPORATION engaging in business around the world. The Forbes 2000 list of “The World’s Largest Corporations” is led by General Motors, followed by Wal-Mart, ExxonMobil, Ford, and DaimlerChrysler. Of the top 25 MNCs on the list, eight are U.S.-based companies, 10 are based in Japan, four are Germany-based, and there are one to two each from Britain, the Netherlands, and France. The contribution of multinational corporations and their subsidiaries to the emerging markets they operate in is debatable. Two contrasting theories center on issues of dependency versus modernization. The dependency theory suggests that market CAPITALISM in the form of large MNCs entering small, less-developed countries leads to exploitation and dependency on the MNCs and inhibits indigenous ENTREPRENEURSHIP. Dependency theorists argue that MNCs monopolize local industrial, capital, and LABOR MARKETS. Economic growth occurs, but it is largely to the benefit of the “triple alliance”: MNCs, government-owned enterprises, and the local capital elite. Modernization theorists, on the other hand, suggest multinational corporations are agents of change, promoting economic growth and development. When a multinational corporation enters an emerging market, it brings with it new technology, managerial training, infrastructure development, and access to modern business practices. Management scholar Peter Drucker contends MNCs are “the only real hope” for less-developed countries (LDCs). They alter traditional value systems, social attitudes, and behavior patterns and encourage responsibility among political leaders of LDCs. Some economists, however, question whether replacing traditional systems with “modern” values is always beneficial to the local population. In today’s economy, global sourcing is a common practice. MNCs purchase materials and components around the world, assembling and producing wherever costs are lowest. With INTERNET communications, corporations now hold vendor auctions, inviting selected suppliers to bid on production of parts and products. Managers argue this results in increased COMPETITION and lower prices. Critics counter that it leads emerging economies to cut their prices by ignoring social costs, including pollution, in the race to keep any EMPLOYMENT and income in their economy. In addition to lack of capital and potential exploitation by multinational corporations, emerging markets face a variety of other hurdles to economic growth and development. Political instability, corruption, protection of property rights, and other risks impair investment and growth in emerging markets.