EMERGING MARKETS

The term "emerging markets," while commonly used, is difficult to define. From the perspective of the United States, an emerging market would be one to which a previously untapped potential for U.S. exports or investment might be anticipated.

By the early 1990s, investors had begun to take emerging-market funds very seriously. By 1993, emerging-market funds returned average gains of 72.13 percent. Such high rates of return attracted the attention of the U.S. Department of Commerce which in 1994 identified ten nations as "Big Emerging Markets," or those that were predicted to have promising prospects for substantial incremental gains in exports from the United States. Included among these were: the Chinese Economic Area, Indonesia, India, South Korea, Mexico, Argentina, Brazil, South Africa, and Turkey. Yet before 1994 had passed, the Mexican peso crisis shook investor confidence in not only Mexico but other officially identified emerging markets such as Argentina and Brazil, and by extension all of Latin America.

Despite the collapse of Latin American markets, investor confidence in emerging markets continued to climb, topping $20 billion in total net assets in diversified emerging-market mutual funds by 1997, notably in East Asia.

Then in July 1997, the emerging markets collapsed. Made cautious by concerns regarding the return of Hong Kong to the People's Republic of China, many investors temporarily halted investments in Southeast Asia. Ironically, the transition of Hong Kong to China went smoothly, but the subsequent downturn in investments to the region caused a real estate crisis in Thailand, which devalued its currency so severely that the effects were felt in an equally overextended Malaysia and Indonesia. Unlike the essentially stable political systems of Thailand and Malaysia, however, the economic crisis in Indonesia uncovered racist tensions, political instability, and corruption so severe that it led to widespread anti-Chinese riots and eventual political collapse. Soon after, the economic crisis spread to other East Asian nations that had strong ties to Indonesia, Thailand, and Malaysia. Singapore was especially affected and faced its most serious downturn since its independence. South Korea underwent its own economic upheavals, including the collapse of major companies and its own change of government. By 1997 the effects of the East Asian economic crisis had destabilized other emerging markets such as Russia and began to affect the overall economic health of even such major developed economic powers as Japan.

IDENTIFYING EMERGING MARKETS

Despite this, emerging markets still remain attractive if they can carry such favorable prospects as stable governments, privatization of key sectors, changes in foreign investment opportunities and rapid economic growth. With some reservations, of the original ten "Big Emerging Markets" identified by the Commerce Department in 1994, only India, Turkey, and South Africa continue to meet those criteria, as does, to a lesser extent, the Chinese Economic Area.

Such East European markets as the Czech Republic, Slovenia, and Hungary also still offer strong growth opportunities as yet unaffected by the Latin American or East Asian economic crises.

Political changes remain among the main reasons certain nations come to the fore as emerging markets. For example, the lifting of various U.S. trade embargoes against South Africa has created a marked potential for U.S. exports following the elimination of that nation's apartheid policies. South Africa has for years been Africa's strongest economy, but the overwhelming response to the political situation in that nation stunted U.S. exports until fairly recently.

Identification as an emerging market could also reflect a change toward U.S. trade within the policy of another established market. This liberalization of trade previously restrictive to U.S. exports could thus inspire new and rapid demand for formerly unavailable U.S. products. The creation of economic zones within the People's Republic of China, for example, made it considerably easier than in past years for U.S. exports to enter China. This, coupled with the liberalization of central control in the designated free economic zones, has led to rapid development. Indeed, Guangdong province (next to Hong Kong) would be the world's fastest growing economy were it treated as an independent state.

Similarly, the post-communist governments of Eastern European nations as well as the newly independent states represent the opening of markets previously walled off from most U.S. exports. While many of these nations remain unstable or economically underdeveloped, the stability of nations such as Poland (the first of the Warsaw Pact nations to throw off a communist or Soviet-influenced government) or the strong manufacturing base of Hungary or the Czech Republic make them potentially promising as emerging markets.

Political factors from abroad have helped some nations emerge as U.S. export and investment destinations. Turkey's active role as an alternative Moslem economic system to such fundamentalist Islamic models as Iran have helped it emerge as a major regional player in the Islamic states of the former Soviet Union, such as Kazakhstan and Turkmenistan. Additionally, Turkey's trade ties with Europe and its repeated attempts to join the European Union (rebuffed for several political reasons unrelated to its economy) have further added to its aura of stability as an emerging market.

The lifting of restrictions in trade simultaneously from both the United States and from another nation could also earmark that nation as an emerging market for U.S. goods. The North American Free Trade Agreement (NAFTA), for example, represented a lifting of trade restrictions in Mexico and the United States taking place in both countries at the same time. This free trade allowed Mexico, already an important destination for U.S. exports, to "emerge" as an even more important export destination. Indeed, it is for this reason that Mexico is still viewed as an emerging market despite political difficulties and the economic instability that followed the 1994 peso crisis.

An emerging market could also reflect the potential for the rapid economic development of another nation with no change in existing trade restrictions directed against the United States or directed against that nation by the United States. For instance, the massive economic reform program begun in July 1991 in India, and still ongoing, has helped to transform its previously stagnant economy. India's moves to deregulate lending rates and bank reserve requirements, its plans to privatize such public services as the telephones, its revamping of foreign investment regulations, and its reduction of many tariffs, have created strong economic growth. With this comes a related U.S. export potential of goods and services directed toward India's steady economic strength.

AFFECTS OF MERCOSUR

The free trade inroads made following the creation in 1991 of the South American customs union, Mercosur, have strengthened the economies of its four signatory nations: Argentina, Brazil, Uruguay, and Paraguay. Mercosur, which formally took effect on January 1, 1995, has added a source of economic strength independent of trade outside of South America. It is at least in part the potential strength of Mercosur that has led to continued interest in the four nations. Thus, both Paraguay and Uruguay continue to prosper directly from their participation in the Mercosur trade liberalization. For example, Paraguay, a major producer of cotton, has traditionally exported only as raw material 90 percent of its cotton to Brazil. Following the formation of Mercosur, it has been able to export manufactured cotton products such as thread and cloth to Brazil without paying duties. The result has been a boom in textile manufacturing in Paraguay.

Similarly, the position of Uruguay directly in the path between Buenos Aires and São Paulo has strengthened the nation's role as a transportation center due to duty-free trucking. The result is the current proposal to build the 47-kilometer bridge over the Rio de la Plata connecting the Uruguayan border city with the Argentine capital on the opposite bank. The bridge, when completed, would be the longest of its type in the world—and would reinforce Uruguay's position as a commercial crossroads. Additionally, the bridge, unthinkable before Mercosur, would substantially cut the transportation time between Mercosur's two greatest industrial centers.

The stability linked to Mercosur, coupled with a decade of economic austerity measures and with fewer protectionist trade policies, has also resulted in increased U.S. export opportunities. In Brazil, the calming of political turmoil, the implementation in November 1998 of marked economic austerity measures, and debt-equity swaps have enhanced Brazil as an emerging market despite its potential economic risks. Finally, Argentina's currency reform—tying the newly coined peso to the U.S. dollar—as well as its elimination of exchange controls and import quotas, has added considerably to its reputation as Mercosur's most attractive emerging market for U.S. investment, and enabled it to recover fairly rapidly from the Latin American economic crisis that had spread from Mexico in 1994.

EVERCHANGING STATUS

Probably, the clearest lesson of both the Mexican peso crisis and the East Asian economic crisis is that no list of emerging markets is ever stable. Once an emerging market does remain consistent, it is no longer "emerging"; rather it is an "established" market. Earlier emerging markets such as Greece, Spain, and Portugal have long since become established. Other markets have come to seem too established to include in a list of emerging markets although they may have grown to the level of established only recently (for example, Singapore).

Some potentially important markets may not be fully justified in being labeled as emerging markets—yet. These future or nascent emerging markets are myriad. One could argue for including Morocco, for example, since at an 11 percent growth rate, it had among the world's fastest growing gross national products in the late 1990s. Yet Morocco has little infrastructure for capitalizing on its rapid growth. One could argue for countries such as Colombia or Venezuela, but their internal political unrest arguably makes them somewhat suspect despite their economic strengths. Thus, any list of emerging markets should not be viewed as definitive but rather as continually evolving.