Communication for Sustainable Development

Emerging Markets cannot escape a global recession

Half of Europe is already in recession and the other half struggles to stay afloat. Japan is swimming in and out recessions, and the US is moving closer day-by-day—Tuesday’s unexpected decline was particularly worrisome even among the most optimistic investors; it comes as no surprise, therefore, that US and European markets sold off sharply on the news. But would a substantial slow-down or even an outright recession spread over to emerging markets?

Absolutely! Emerging markets are direct or indirect sellers of economic resources and final goods to mature economies, and a recession in these economies will certainly spread to mature economies. China, for instance, sells final goods to the US, while Brazil, Chile, and South Africa are selling raw materials to China. It goes without saying, therefore, that a US recession will be followed by a significant slow-down in the emerging economies, and an even more significant slow-down in the equity markets of these economies, as was the case in 2008—The iShares of the Emerging Markets Fund (EEM) dropped in tandem with SPDR 500 (SPY) and the Power Shares QQQ Trust (QQQ).

Investors in emerging markets further assume a number of country-specific risks, as most of emerging economies do not have the right mix of institutions, “the regime” that makes economic growth steady and sustainable. Latin American emerging market economies, for instance, lack a fair and transparent regime that lets markets deploy resources efficiently and effectively. African emerging market economies have yet to develop a democratic system that respects property rights, as one regime privatizes and the other nationalizes, magnifying business risks and uncertainties.

Emerging markets from China to India, and even Greece apply the right models in the wrong sectors of the economy: they extend government’s role in areas of the economy markets excel, and limit its role in areas of the economy markets fail–creating a dangerous cocktail of institutions that undermines the economic efficiency and dynamism of these countries. Emerging market corporations aren’t what they seem to be, fast growing enterprises that enhance shareholder value. Instead, they are partnerships that enhance the interests of government bureaucrats, union bosses, and local moguls that are in control of management and the regime they operate. This is especially the case for the majority of companies privatized in the 1980s and the 1990s, which attracted the interest of foreign investors like Petrobas (PBR) in Brazil and China Petroleum and Chemical Corporation (SNP), as well as Chinese banks listed in Hong Kong and Shanghai Exchanges


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