Cambiar Insights

  • April 9th 2015

    Emerging Markets – The Next Act Is…?

    Emerging Markets – The Next Act Is…?

    Arguably, the fall of the Berlin Wall was the most significant political event of the late 20th century.  The ideological conflict between state-led communism and Western free market capitalist economies was won decisively by the West.  Billions of people locked away in various state-controlled economies suddenly had no other paradigm to emulate but that of the Western democracies and related free market economies.  With communism disgraced, the political and military center of the state-led world, the Soviet Union, was dismantled two years later.  The rise of Emerging Market economies in the 21st century was a direct consequence.

    As we enter the second quarter century after the end of the Cold War, many Emerging Market nations need to shift their development models from commodities, exports, and infrastructure to higher value-added products and services. This transition is not easily made; many developing nations fail or bog down in the process.  Ironically, just as the going is about to get tough, the old alternate geopolitical pole of Russia has re-emerged. 

    The embrace of American-style capitalism and governance is a very recent affair for many Emerging Markets and is not necessarily the result of longstanding admiration / emulation / cultural affinity with our economic and political system. Rather, the free markets economic development models that Emerging Markets have adopted stems more from expediency.  All other models failed. The history of free market capitalism is both brief and not all that well rooted in the culture, institutions, or legal frameworks of Emerging Market nations. This is a non-trivial risk factor to be mindful of as free market capitalism has a downside, namely that it does create winners and losers – sometimes very extreme ones at that.  The American cultural, legal, and institutional system is well adapted to these realities, and as key industries restructure, adapt, mutate, and experience breathtaking success or failure within the creative-destruction that is free market capitalism – we don’t really give it a second thought. However, in nations where the creative-destruction process is neither so well-understood nor institutionalized, adapting to change, particularly when the changes involve failure or dislocation in the near term alongside major success stories, tends to generate unusual responses that interfere with the verdict that free markets might otherwise render, and that can lead to surprising political paths. These can include protectionism, state intervention, corporal punishments, capital flow restrictions, rapid changes in the law, or even withdrawal from the free markets system as possible reactions.

    One would not have predicted the absolute victory of American-style capitalism and the scope of successful emulation in the world's most populous nations 25 years ago.  One would not predict that the world would devolve into isolated trading blocks or economic zones now.   Yet this seems exactly where a belligerent Greater Russia is going.  Dozens of Emerging Markets are poised to endure at best a frustratingly long transition to higher value-added products in the next few years, or alternatively will succumb to significant currency and economic dislocations because they are unable to sustain the intellectual pace of an increasingly digitized world. Lacking the institutional and cultural affinity towards a non-statist economic model, we may see further instances of isolationism and the heavy reach of the state revisit the world scene as a response. 

    Brian M. Barish, CFA - President

     

    Tags: emerging  markets  Russia  Berlin  wall  capitalism