The best books on Emerging Markets

Maybe a good starting point would be to ask what ’emerging market’ means and how the term emerged. How is it different from a developing country, and who decides when a country is emerging, rather than a backwater?

The term ‘emerging market’ was coined by a former World Bank official, Antoine van Agtmael. He coined the term in the early 1980s. Later, in 2007, he wrote a book called The Emerging Markets Century. It was really about the future of business. He was looking out 10, 20 years and suggesting that there were a group of countries now on a very rapid phase of economic development. Not only would foreign companies become increasingly interested in investing there, but local companies would also spring up. This was something which international investors needed to take very, very seriously — otherwise, they would miss out on incredibly powerful opportunities.

“How do we know which emerging markets have  the opportunity to refresh and reboot and become really successful in the future? What are the critical issues that might prevent that from happening?”

So he said that these countries were ’emerging.’ In other words, they were not rich countries, like standard members of the OECD: the US, the UK, countries in Western Europe, Japan, and so on. Neither were they what we used to call ‘third world’ countries, or developing countries, which were generally regarded as poor in terms of measured per capita income, not completely uninteresting because some of them had manufacturing, some of them had resources and commodities. But here was a group of countries that he claimed would become increasingly significant from a corporate and business point of view. So it is almost like a halfway house between what we used to understand by developing countries and the rich world. That’s really the genesis of the term ’emerging markets.’

There is a wealth of written material on emerging markets. A lot of that has been compiled for investors, as indeed van Agtmael’s work was, dealing with investment flows. The books that you’ve selected look at emerging markets from a slightly different perspective, and try to understand how it is that these markets emerge, or I suppose, more broadly, what the opportunities or the roadblocks are in the way of successful economic development.

Yes, and the perspective that I’ve taken here is partly with the benefit of hindsight, because, over the last two decades, the whole world has been watching the growth of what used to be called emerging markets. More and more countries have joined the nomenclature, of this group of countries. Then, after 9/11, Jim O’Neill—who was the chief economist at Goldman Sachs—coined the term ‘BRIC’s for a group comprising Brazil, Russia, India and China. Later he added South Africa to that group. These were the biggest emerging markets that were growing like gangbusters in the 2000s.

My selection of books is looking back even further. I’d like to claim just a small amount of prescience with the book that I wrote myself because I was sceptical that we were able to extrapolate—almost as on a spreadsheet—the future, based on what had happened in the previous 10-20 years. My perspective in choosing these books is about what’s gone wrong with the whole narrative about emerging markets and how do we know which ones have, or might have, the opportunity to refresh and reboot and become really successful in the future, and how do we know what the critical issues are that might prevent that from happening.

I liked the very broad arc taken by Ian Morris’s book, Why The West Rules (2010). As much as anything, it is about the development of mankind and what it means for human societies to flourish.

Of all the books that left an indelible impression on my mind, this is certainly one of them. It’s a veritable tome — some 900 plus pages, but it is very interestingly written. It’s about the development of mankind from primitive times to the present day. Morris articulates a part of a very interesting narrative, which feeds directly into the whole contemporary debate about emerging countries. What he is interested in demonstrating is how, over vast swathes of time, the West and the East were basically playing catch-up with one another. He’s an archaeologist and historian, and he demonstrates—through his research and discoveries of archaeological material—that, actually, for all of history until about the 18th century, there was very little difference in the pace of development of mankind between what we now call the ‘western hemisphere’ and the ‘eastern hemisphere.’

“What is it that causes countries to grow and develop and become part of the global system, the trading system, the investment system and then, suddenly, reach a point in their development when they are not making relative progress anymore?”

He traces the key factors, and he devises a measurement system to try to understand what caused human development to accelerate and sometimes, again, to regress, and then to accelerate, and then to regress. These factors were not dissimilar between East and West, and there was never really much to choose between them until the very early stages of the Industrial Revolution. When that really got going, the West stole a lead on the rest of the planet and just powered ahead in the way that we now understand.

I think it’s very interesting to understand why that happened, and what the critical success factors were. Because when we try to understand, today, countries which, maybe 10 or 15 years ago, we thought were going to be really successful, and we look around now and find that, actually, many of them either have not been successful, or have run into roadblocks, those same questions come back to us. What is it that drives human development and how do you secure it for the future? How do you keep going? The contemporary economic way of looking at this is basically trying to understand a concept that’s been called the ‘middle income trap.’ What is it that causes countries to grow and develop and become part of the global system, the trading system, the investment system and then, suddenly, reach a point in their development when they are not making relative progress anymore? That’s what Ian Morris’s book prompted me to think a lot harder about. That and much, much more.

I was struck by the contrast in his thesis from some of the stuff that was written at the time of the fall of the Soviet Union, which was very triumphalist in tone. I’m thinking, in particular, of Francis Fukuyama‘s “The End of History.” There’s still a lingering sense that there’s some sort of inevitability about the West’s dominance over the past 200 years. One of the things that this book makes abundantly clear is that none of this was foreordained. One line I particularly liked was where he says, “Change is caused by lazy, greedy, frightened people looking for easier, more profitable, and safer ways of doing things, and they rarely know what they are doing” — that sense that history is happenstance, to a large degree.

His skill sets and his academic orientation obviously lead him to that conclusion. I suppose, in the economics profession, we probably wouldn’t tilt quite as much to happenstance. We think it’s a little bit more than random. It’s probably being a bit harsh, but we probably do think that it is a bit more deterministic, or at least that political economy is more deterministic. Although some of the things that Morris cites throughout his analysis—which include climate change and other physical issues and war: I mean just the capacity of people to destroy what they create sometimes—are pretty important factors in the history of human development. If you’re just looking at it through an economist’s eyes, you would tend to say, ‘Well, OK, if these things happen, then we have to start again.’ We assume that they won’t happen, at least in any kind of predictable pattern.

Let’s move on to Why Nations Fail (2012). Here’s a book that deals at some length with the middle income trap, and suggests ways or points to empirical examples of nations that have successfully escaped that trap, by two practising economists.

The key to this book is really all in an early example in the text, where they cite the small town of Nogales on the Arizona-Mexico border. The border basically goes through the middle of the town: you can drive a cigarette paper through the differences between the people on the two sides of the border. They’re from similar families, they’re related, they have shared history and so on, but one of them is in North America, and the other is in Mexico. There are visible and quite stark contrasts in the standards of living and prosperity of people who live either side of the border. The question they ask is, how did this happen? This leads them to an issue which crops up in Ian Morris’s book as well, and I think is an absolutely essential factor to look at when we try to understand relative speeds and levels of economic development, which is the role of inclusive institutions.

“What if the Spaniards originally, many, many hundreds of years ago, had actually gone to North America? How would that have changed the course of human development on that side of the Atlantic?”

This is not something that is necessarily taught in Economics 101. If you go through a standard graduate degree in economics, you don’t do very much other than mathematical economics and micro, and some applied economics. In this academic tradition, the role of institutions and the role they have played historically gets pretty short shrift. This may be changing, as the way that economics is taught at undergraduate level is re-evaluated. But the role of institutions is really important for societal development.

Another example that James Robinson and Daron Acemoğlu raise in the book—an issue others have raised as well—is a hypothetical one: What might have happened if Christopher Columbus had landed in another part of America? What if the Spaniards originally, many, many hundreds of years ago, had actually gone to North America? How would that have changed the course of human development on that side of the Atlantic? It’s a hypothetical question so you can’t really answer it. But it emphasises, I think, that there’s only so much you can do by deploying labour and capital accumulation. Once you’ve reached the physical limits of exploitation of the resources that you have to hand, you have to do something else. So what you are really interested in trying to improve is the quality of labour and the quality of capital — which is about skills, education, management, innovation and science and all of the things that make the whole bigger than the sum of the parts. The role of institutions—whether they’re competition institutions, or regulatory institutions, or government institutions or educational institutions—is of huge significance.

I find their emphasis on inclusiveness very interesting. The counter-argument, which you often hear in investor circles, is that authoritarian societies are better at marshalling society’s resources towards economic ends. These economists suggest that the opposite is true; that without inclusive institutions, you may be able to escape poverty, you may be able to escape the middle income trap, but ultimately, you won’t be able to attain the West’s level of prosperity. Which raises doubts about the Chinese model.

I think it’s maybe that non-inclusive political systems either can’t retain or can’t sustain it. This is a very trenchant part of the modern debate, particularly in the wake of the financial crisis of 2008. People now talk about the Washington consensus versus the Beijing consensus, or the free market view about how domestic and international institutions function verus the role of state institutions and a bigger role for government in the economy. These ideas permeate the veins of political debate in all Western elections in one shape or another. So, yes, I think the emphasis on inclusive institutions is really important.

“We’re not necessarily saying that Western democracy is the only form of political organisation which can achieve economic success.”

We’ve seen examples of what happens with exclusive or dictatorial type regimes — whether you’re talking about the dictatorship of the Communist Party in the USSR, or about Venezuela, or Brazil under military rule. If you look around the OECD, there really aren’t any examples of societies that have achieved the status of that prosperous group by having exclusive institutions, or institutions that are dominated by a particular class or a particular individual.

There are some grey areas. If you look, for example, at Singapore, it’s not a member of the OECD but it is obviously a very rich country or city state. If you look at Japan or South Korea, we assume and naturally take these as examples of countries that have democratic forms of government and inclusive institutions. But aficionados may actually say, ‘Yes, but…’: Although they have had democratising reforms and institutional changes and so on, they were, for very, very long periods of time, one-party states. They may have elections, but in Japan, for example, because of the dominance of the Liberal Democratic Party, you could argue it still pretty much is a one-party state, even though there are smaller political parties as well.

So there is room for debate. We’re not necessarily saying that Western democracy is the only form of political organisation which can achieve economic success. But it does set out, I think, a model of inclusivity, which others have sought to emulate in their own different way, and is very different from the USSR, or even modern Russia, and certainly China today. Those distinctions certainly do hold.

A key question—and a country that keeps coming up again and again in all of this literature—is about China, which brings us neatly to your third choice, a World Bank report entitled China 2030 (2012). I was struck by the subtitle: Building a Modern, Harmonious, and Creative Society — three words that don’t readily leap to mind in describing China, certainly not today, possibly not even in 2030, even for the more imaginative amongst us.

This is arguably more of a research paper than a book. It was written by the World Bank in conjunction with a think tank called the Development Research Centre which is directly associated with China’s State Council. I don’t really know whose title this was: whether it was a title that both organisations agreed on or whether it was something that was proposed by the DRC or the World Bank. But it touches on words that are quite meaningful for China — maybe for everybody.

It should go without saying, but we may as well acknowledge, that there is no precedent, that I know of, of a country that has catapulted itself from being a poor country to a middle income country in such a short period of time as China. And if you think of the range of income per capita within that, there is low-middle, middle-middle, and high-middle. China is now a middle middle-income country. So there’s a lot of focus in China not just under the current leadership, but also under the previous leadership, under Hu Jintao and Wen Jiabao, about what it means to be a modern society and a modern economy. They are very keen on being thought of as a modern economy. How do we, in China, fulfil the aspirations of modernity?

“Very few of China’s leaders turned up to the reception. I don’t think they actually liked some of the things that the World Bank said in the report.”

The idea of harmony is an inexorably Chinese concept. It comes out of the Party’s mantra about a harmonious society, which is really a Confucian concept. Society is in an optimum state when it’s harmonious, and this is when you have a benevolent leader or leadership, and society is very well structured underneath that leader.

And I suppose ‘creative’ is about innovation. Innovation is something the Chinese government is very, very keen to emphasise as key to future success, and being creative is obviously part of being innovative.

So these things are really about China’s aspirations for the world. I think it was the World Bank that originally proposed the idea of doing this report to the State Council. It was jointly authored and signed, although when the report was released in Beijing with a big press conference, very few of China’s leaders turned up to the reception. I don’t think they actually liked some of the things that the World Bank said in the report. That’s because while the report stands as a testament to the wondrousness of China’s economic development, it’s also about the critical success factors which China will have to check, so to speak, in the next 20 years, if it is to avoid falling into the middle-income trap. The World Bank’s words emphasise this is something that has happened to most emerging and developing countries. It’s a plaudit for how far and how fast China has travelled in such an incredibly short period of time, but also a reality check. If you want to go to the next level, then things have to change. It’s all about the kind of reforms and institutional changes, some of the things we’ve already spoken about.

It’s got tremendous lessons for other emerging market countries that are looking to escape the middle-income trap. Although it wasn’t written specifically as a guidebook, it could be read that way.

Yes, it goes into a lot of detail. For example, it looks in detail at migration in China. It looks at the social and economic status of migrants who go from the countryside to live and work in urban areas. Up until relatively recently, these migrants really lived as second class citizens without access to welfare, to schooling, to housing, or to social security. This is one area where there is certainly movement afoot, to try to alleviate the conditions under which migrants live and work in cities — to give them rights and access to welfare and housing. But there’s a lot of resistance to this, not just from provincial governments who are worried about overcrowding and too great a concentration of people in urban areas, but also from urban residents who don’t want to share their privileges with people from the countryside.

I just mention that as an example of some of the issues that are investigated by the World Bank in China’s case. The report gives an indication of what’s required in social reform, in economic reform, in enterprise reform, wealth transfer, financial reform, property rights — just a whole array of things that need change if China wants to aspire to be ‘modern, harmonious, and creative’ in 2030.

Let’s go on to your next choice. This is one book that does read like a user’s guide, written by a user, an emerging market practitioner. This is The Rise and Fall of Nations 

(2016) by Ruchir Sharma.

This is the most recent book I’ve chosen, it came out in June. Ruchir Sharma is an emerging markets strategist at Morgan Stanley Investment Management, and he brings a practitioner’s view and writes in a very accessible style. If some of the books I’ve chosen sound a bit stuffy and written from an academic point of view, Sharma writes from the standpoint of somebody who travels a lot to different countries. He’s an Indian. He knows a lot about his own country, he knows China, he knows Mexico, he knows a number of emerging countries and devises strategy for investing in them. He has set out a series of phenomena that he regards as critical success factors for emerging countries, to do with wealth concentration, commodity concentration, and corruption, to name just three.

He has a fairly restrained perspective. I wouldn’t say it’s pessimistic, necessarily, because I think he believes that there are rules of development that countries can fulfil. But he’s optimistic about the United States, for example.

He’s quite conscious of something some economists are very keen on which is that geography matters quite a lot to whether you are going to be successful or not. So, if you happen to be slotted into a geographic zone of prosperity, because you happen to be within close proximity of Germany—which emerging countries like the Czech Republic and Romania are—then it is a lot easier for you to piggyback off the success of successful countries than it is if you happen not to be in somebody’s supply chain, or if you happen to be geographically a bit isolated.

He is also very keen on drawing a distinction between countries that have what he calls ‘a heavy hand of government.’ He talks about the heavy hand of government, say, in the case of the banking system in India. China is an obvious key case in point. The driving force of growth in China is the private sector, but it’s the state sector—through the state-owned banks and state-owned enterprises—that occupy the commanding heights of the economy. They stifle growth in much of the rest of the economy because they consume a huge amount of resources and subsidies, and special privileges and favours, and so on and so forth.

There are echoes here of classical political philosophy. I mean, he calls it The Rise and Fall of Nations, and it seems to me quite a useful antidote to the idea that the emerging world will one day, perhaps inevitably, converge with the rich world. Instead, what he advocates—and this holds for prosperous countries today as well as the less prosperous that are catching up—is that you’ve got a series of cycles. A lot of this work is about where countries find themselves on their respective cycle.

If we think back just a few years to the global financial crisis, which really began in 2007, there were very few naysayers. Everybody was a cheerleader for emerging countries because they were riding the crest of a wave. When we look back now, we can see, much more clearly than was apparent in 2006-7, that the wave they were riding was a cyclical one, in large measure.

“It was the proverbial tide that lifted all the boats in the emerging world. But as Warren Buffett reminded us…it’s only when the tide goes out that you can see who has their swimming gear on.”

I don’t want to diminish the structural improvements, which a number of countries have made. Think about some of the countries in sub-Saharan Africa. Africa has always been the lost continent, it’s always the continent of the future, and every time people think that Africa is the continent of the future, something happens and it regresses. Actually as United Nations reports show, there are a number of countries, particularly around East Africa—Rwanda, Tanzania, Kenya—where there have been very marked improvements in social cohesion and in governance. Across the continent, there is reduced incidence of tribal conflicts and cross-border conflict. We shouldn’t be dismissive about the capacity of countries to self-improve, or about governance improvements, or about the ability of countries to exploit resources and deploy labour and capital well. These things can all be learned and can all be done.

But when we look back now on the 1990s and particularly on the 2000s, we can see that a lot of what happened was one of the most virulent commodity cycles which we’ve had, probably since the 1970s — which also ended in tears for emerging countries. Many of them went on to experience economic dislocation and political problems in the 1980s and the early 1990s.

Again, why Sharma’s book is interesting about the rise and fall of nations, is that we can see how the cycle helped. It masked what we all thought was a new world in the 2000s, a globalisation cycle which was kicked off by the openness of Deng Xiaoping in China and the fall of the Soviet Union, which both happened around the same time. So the globalisation cycle, the IT or information technology cycle, the commodity cycle, all colluded, as it were, to produce an incredibly powerful economic upswing in the 2000s. It was the proverbial tide that lifted all the boats in the emerging world. But as Warren Buffett reminded us, and seems apt for the period after 2007-2008, it’s only when the tide goes out that you can see who has their swimming gear on. I think this is why Sharma’s book is valuable, because it helps us to understand a little bit about what the cycle basically hid and what’s laid bare, once the cycle has gone into reverse or is facing big headwinds.

In closing, let’s talk about cycles from a really big picture perspective. Let’s talk about generations rather than business cycles, because one issue that you’ve written about at length that isn’t much discussed, at least in most of the investor-related market literature, is demographics.

This is an absolutely crucial overlay on everything that we’ve been discussing about human development and economic growth, and middle income traps. Let me give a little bit of perspective. I’ll obviously leave it for readers to decide for themselves what they think about this. But it is worth reflecting on the fact that the Japanese economic miracle basically came to an end in 1989-90 — more or less as the working age population, as a share of the total population in Japan, peaked. I’m not saying it was the only thing that mattered or that Japan’s trials and tribulations since 1990 are all attributable to a declining population and an ageing society, but it can hardly be dismissed as irrelevant.

“It is worth reflecting on the fact that the Japanese economic miracle basically came to an end in 1989-90 — more or less as the working age population, as a share of the total population in Japan, peaked.”

In the same vein, if we think about the rest of the West—the United States and Europe—they also reached the pinnacle of their economic boom from the 1980s onward for 25 years. That cycle burst in 2007-2008, more or less at the same time as the working age population, as a share of total population, peaked. It’s early days. It’s only been eight years since the collapse of Lehman’s, and demographics move glacially. However, we are confronting huge issues from a demographic standpoint, which influence economic variables in a very, very fundamental way. They impact on savings, consumption, investment, patterns of consumption and investment, public debt, pension fund liabilities and the viability of pay-as-you-go schemes all over the world. All these things matter a lot for us now. You can’t read a newspaper or a book about what’s going on in the West without seeing a huge focus on the impact of an ageing society.

It has a universal application, although different countries will confront these problems at different times. For the most part, at this point in time, the economic, social and political challenges produced by ageing are the prerogative of developed market economies. But they also include the Asian ‘tiger’ economies: Singapore, Hong Kong, Taiwan, and South Korea. South Korea, in some respects, is ageing much more quickly. It’s not as old as Japan, but it is ageing faster. Also China: It’s certainly not the oldest economy in the world, but, by some metrics, it’s the fastest ageing country on the planet. If you extrapolate demographic projections and demographic data, then by 2035 to 2045 the old age dependency in China will be higher than it is in the United States. In other words, there will be fewer workers per one hundred of retirees in China than there will be in the United States. Unless these is some sort of major change either in fertility or in morbidity—and these things take generations to happen—this is something that is going to happen to everybody.

“Of the 101 countries that were deemed to be middle income in 1960, only 13 of them actually made it into the rich countries’ league. The rest basically didn’t really get there.”

The last place on earth where ageing will be a problem will be in sub-Saharan Africa. There, it will probably be from about the 2060s onward, so a long, long time away. But between now and 2030, 2040, a lot of countries in Asia and in South America will have to pay attention to this. Actually they have to pay attention to it now because if you leave it for another 20-30 years, it’ll be too late.

The interesting phenomenon is that because of what’s happening to fertility and life expectancy, the tipping point for France, Germany, America, Britain, and Italy took between 75 and 110 years. To get to the point where their old age dependency starts to reach a critical level, in most emerging or developing countries now, that same critical moment will arrive within 20 or 25 years. It’s been telescoped to maybe a quarter of the time that it took most OECD countries to get to this stage. That’s because of the diffusion and profusion of lifestyle habits, diet, the availability of drinking water, and good public health, and so on and so forth. This has hatched a very important cliché which was originally made in respect of China but I think it applies to a lot of countries, which is, ‘getting old before you get rich.’ All of the decades and decades and decades that it has taken us in the West to develop social security and welfare systems as we know now are still inadequate for the purposes for which we anticipate. For most of the countries in the world with lower per capita income than what we have today, they face a huge, huge challenge.

A final question to you: to what extent do you think emerging markets is still a useful designation? Readers may have seen that HSBC advert at the airport boarding a plane, which has the motto: ‘In the future, there will be no markets left waiting to emerge.’ That presupposes a perhaps facile assumption that it’s all converging on Western standards of prosperity. Actually, maybe all of that falls by the wayside when confronting a rather more profound dynamic, namely the rate at which societies are ageing and the challenges that that imposes?

I’ve always been a bit of a sceptic about the idea that the whole world was converging. One of the things that has happened with globalisation in the last 25 years is that the world has removed so many people from poverty. The narrative of convergence was coined, and people still use it as though there was something inevitable about it. I don’t think there is anything inevitable about it. I think you can make it happen and I think there are ways in which it can happen. But it comes back to the phenomenon of the middle income trap, which is not something that has disappeared, in my judgement. A noteworthy detail early in the World Bank report we discussed earlier is that of the 101 countries that were deemed to be middle income in 1960, only 13 of them actually made it into the rich countries’ league. The rest basically didn’t really get there. Most of them didn’t regress or become substantially poorer. They are still deemed to be middle income.

“Italy is a country that has had no economic growth since it joined the Euro in 1999.”

So thinking about the future, we have to be cognisant that it is perfectly within our capacity to screw up global integration and put up barriers, and fight each other, and do all sorts of horrible things. We can set back the cause of progress with great ease, unfortunately. But leaving that to one side, the optimist in us should certainly hold out the prospect that over time, people will become more sophisticated, better off, healthier, and poverty levels will continue to fall. But that doesn’t necessarily mean that convergence will get to the point where everybody will have the same per capita income as the United States, or as Germany, or as Japan.

There is a big difference between a rising level of income and prosperity and relative levels of income and prosperity. Convergence does not necessarily have to happen. Of course it could happen if the Western world itself regresses. Italy, for example, is a country that has had no economic growth since it joined the Euro in 1999. Institutions can go backwards too. That’s something that a lot of Western countries need to reflect on. In the West, we need to bear that in mind. So we could get a reverse convergence where some emerging countries are actually making progress, and the countries that they are trying to converge towards are actually falling back. That’s a possibility, and one that we would not welcome.