Re­defin­ing emerg­ing mar­kets

The Pak Banker - - OPINION - Peter Mar­ber

The ques­tion of what con­sti­tutes an emerg­ing mar­ket has haunted me for decades. Since 1989, the World Bank has de­fined an emerg­ing mar­ket as a coun­try with a GDP per capita ceil­ing of $13,000 or less. But gross do­mes­tic prod­uct is sim­ply a "wealth" statis­tic. A coun­try with $12,999 in GDP per capita is very dif­fer­ent from one with $1,500. Thus a new, multi-di­men­sional method of clas­si­fy­ing emerg­ing mar­kets is called for, one that takes into ac­count a clus­ter of dif­fer­ent in­di­ca­tors to pro­duce a rank­ing of coun­tries' so­cio-eco­nomic mat­u­ra­tion. Hav­ing traded in and taught about these coun­tries for more than 20 years, I have wit­nessed im­mense progress among many emerg­ing mar­kets, but of­ten this progress has not been fully ap­pre­ci­ated by ei­ther the providers of fi­nan­cial in­dices or in­vestors.

I started ask­ing my­self, be­sides GDP, what are the other di­men­sions that de­fine a coun­try's mat­u­ra­tion? Are there more ob­jec­tive ways to an­a­lyse and clus­ter coun­tries? Are not coun­tries more nu­anced than the blunt de­scrip­tions "ad­vanced" and "emerg­ing"? My gut feel­ing was yes, but I needed an ob­jec­tive, "big data" frame­work to an­swer these big ques­tions. Last year I probed these ques­tions us­ing Ward's Method, a quan­ti­ta­tive ap­proach that clus­ters things based on the "min­i­mum vari­ance" of cer­tain fac­tors - that is, group­ing things whose qual­i­ties were sta­tis­ti­cally most sim­i­lar. My idea was to batch 100 coun­tries (both ad­vanced and emerg­ing) into 10 clus­ters. Group 10 would have the high­est scores awarded for nine spe­cific cri­te­ria, de­not­ing more ma­ture coun­tries that may be more re­silient to po­ten­tial shifts and shocks. Group 1 would have the low­est scores, sig­ni­fy­ing those coun­tries that are less ma­ture and more vul­ner­a­ble to an ar­ray of risks.

The mem­bers of each group were ar­rived at by as­sign­ing nu­mer­i­cal val­ues to each coun­try re­flect­ing the nine dis­tinct cat­e­gories. Thus a coun­try with a high per capita GDP would be given a high score in the cat­e­gory con­cerned with this met­ric. The other eight cat­e­gories in­clude two for pop­u­la­tion size and com­pet­i­tive­ness, three for credit rat­ings, stock mar­ket pen­e­tra­tion and cur­rency val­u­a­tions, and three for heath, ed­u­ca­tion and po­lit­i­cal cli­mate. I com­pared year-end 2003 and year-end 2013, of­fer­ing a view on the changes that took place over an im­por­tant decade of glob­al­i­sa­tion that em­braced the five years lead­ing up to the 2008 cri­sis, and the five years fol­low­ing it.

The re­sults were fas­ci­nat­ing. First, the nu­mer­i­cal scores from five economies did not clus­ter with any group be­cause of out­sized en­dow­ments in one or more ar­eas. These coun­tries in­cluded the US, which de­fied the clus­ter be­cause of its large and wealthy pop­u­la­tion; China, which did not clus­ter be­cause of its huge pop­u­la­tion; In­dia, which did not fit be­cause of its large pop­u­la­tion and many dif­fer­ences with China; Hong Kong, which was anoma­lous be­cause of its com­bi­na­tion of high wealth, strong fi­nan­cial de­vel­op­ment and small pop­u­la­tion; and Qatar, which is an out­lier be­cause of its wealthy and small pop­u­la­tion.

Sec­ond, most "emerg­ing" coun­tries rose up the rank­ing dur­ing the decade while some "ad­vanced" economies slipped. The re­sult was a bunch­ing-up in the 5th-8th clus­ters from 27 coun­tries in 2003 to 47 in 2013. Among the big ad­vancers were Ghana, which climbed from Group 1 to Group 6, while big losers in­cluded Ice­land, Ire­land, Italy and Spain, which all slipped from Group 10 down to Group 8. Cyprus and Greece slid from Group 9 to Group 7. The two big sur­prises came from the Mid­dle East, with Kuwait and the United Arab Emi­rates drop­ping from Group 8 to Group 4.

One in­sight the study throws up is that it may be in­struc­tive to view the de­vel­op­ment of coun­tries as a con­tin­uum in which each stage of so­cio-eco­nomic progress may not be per­cep­ti­bly dif­fer­ent from each other, though the ex­tremes are quite dis­tinct. In­deed, be­cause many "emerg­ing" coun­tries have closed many so­cio-eco­nomic gaps and con­verged with "ad­vanced" ones, it is now tough to say where "emerg­ing" ends and "ad­vanced" be­gins. Another in­sight is that so-called emerg­ing mar­kets are now gen­er­ally more ma­ture than they were a decade ago and too big for in­vestors to ig­nore. They con­trib­ute more than 50 per cent of global out­put on a pur­chas­ing power par­ity ba­sis, most have ro­bust "in­vest­ment grade" credit rat­ings and have fast-grow­ing fi­nan­cial mar­kets. China's dra­matic rise is also note­wor­thy. It has a credit rat­ing sim­i­lar to or bet­ter than most ad­vanced economies (AA mi­nus), while also hav­ing the world's sec­ond-largest stock mar­ket and an econ­omy that ranks sec­ond in size to the US in nom­i­nal terms. These di­men­sions - com­bined with the fact that its econ­omy is al­most as large as all other emerg­ing mar­kets com­bined - ar­gue for re­mov­ing China from its cur­rent clas­si­fi­ca­tion as an emerg­ing mar­ket and cre­at­ing a sep­a­rate cat­e­gory for it alone.

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