EMERGING AND DEVELOPED MARKET ECONOMIES
In our monthly newsletter we often refer to emerging and developed markets. We refer to inflation problems in the more mature/developed markets whilst often the emerging markets deal with conflict – just why are the countries of the world separated into these two clear and distinct categories? In this month’s Financial View, we try explaining the difference between countries considered to be developed and those that are considered to be emerging.
Investopedia defines a developed economy as “typically characteristic of a developed country with a relatively high level of economic growth and security. Standard criteria for evaluating a country’s level of development are income per capita or per capita gross domestic product (how rich the citizens are), the level of industrialization, the general standard of living, and the amount of technological infrastructure.
Non-economic factors, such as the human development index (HDI), which quantifies a country’s levels of education, literacy, and health into a single figure, can also be used to evaluate an economy or the degree of development.”
Looking at the map of the world one can see that these are the countries in North America, Europe, Australia, New Zealand, South Korea and Japan.
Emerging economies account for the bulk of the rest of the world in that they don’t meet all the criteria of a developed economy (they may meet many such as South Africa with its very sophisticated financial markets), especially the measurement of wealth.
Gross Domestic Product Per Capita
The GDP per Capita is calculated by dividing the country’s total GDP by its total population. A higher number indicates that the average citizen of a country is wealthier. South Africa has a GDP per Capita of $11 911. New Zealand as a comparison has a GDP per Capita of $41 072. They might not be able to beat us at rugby, but their citizens do at this stage have the advantage of on average being almost four times wealthier.
The lower wealth per capita of certain countries has allowed them to position themselves as the world’s factory. Labour costs are lower and products can be made in emerging markets for sale and consumption in developed markets.
A few examples of how some of the economies look
Treemaps are great visual tools. The total area will always add up to 100% but they can demonstrate how diversified or concentrated an economy may be. We have included below visuals showing export data gathered by Harvard. The graphics effectively represent what each country sells.
United States
The United States has a very diverse economy with many blocks, most of which are too small to even be represented. The biggest sector of exports for the US are services based and worth noting the dominance of IT and finance.
China
The main takeaway from this chart for China is that their total exports are higher than the United States. China tends to be strong in manufactured items.
South Africa
Compared to the previous two graphics one can see that South Africa has a number of very large blocks. This just demonstrates that our economy is less diverse, and we rely heavily on some key industries, dominated by mining, resources, cars and agriculture.
Democratic Republic of the Congo
We have included the DRC just to demonstrate what a least developed economy may look. The country is very reliant on mining and commodities exports with mining accounting for over 95% of the country’s exports.
General Summary of the differences between Emerging and Developed Economies
The following table is lifted from the paper Trends in Business Markets, written by Rajdeep Grewal and Gary Lilien. It highlights some of the broad differences between Emerging and Developed Markets.
It Is interesting to note how South Africa qualifies as an emerging market on a number of metrics:
- Elements of infrastructure failing
- Largest buyers are often state-owned enterprises (hence the ease of state capture)
- Political environment is volatile at times
- Collectivist purchasing behaviour for large portions of the population
- Relatively young population
Unfortunately, the one metric that we lag our emerging market peers is we don’t have a high growth rate. Most of this can be attributed to failed economic policies, cadre deployment and corruption, however given that we have many other pieces of the definition in place we have the potential to improve our growth rates.
The Problem facing the Developed Countries
The developed countries face one significant challenge, which is that of an ageing population. One of the challenges facing every country is that of “balancing their books”. Each country needs sufficient income from taxpayers to cover expenses and also services for those that don’t earn income, either through unemployment and those too old or too young to work. The youth is often viewed as a positive as they are the future workers of the world whilst conversely the elderly are viewed in a negative light, as they are no longer productive. Due to advances in medical science, we are all living longer and that together with a decline in birth rates has demographics changing quite markedly.
The above graphic reflects the best estimates of the OECD regarding demographics. Across the world the median age is forecast to increase for both developed and emerging markets by 2060. The dots represent how many people in a country over 65 compared for every 100 people aged 20 to 64. The countries that are OECD members include the majority of developed countries. The Non-OECD countries include many of the larger emerging countries, including the BRICS countries. You will see that in the large dots which represent the numbers as at 2020, the Non-OECD countries had a lower ratio of people older than 65 to people of working age. Each segment is ordered from the lowest ratio (best) to the highest with Japan currently have around 50 older people for every 100 people of working age.
The small dark blue dots represent what OECD estimates this ratio will be in 2060. All countries are estimated to have their ratio increase with South Korea being highlighted as being in real trouble and South Africa the country expected to fare best. China as a Non-OECD country is a bit of an outlier, but it does demonstrate the impact of their one child policy. Overall, however the developed countries are forecast to “age” more than the emerging countries.
John Ibbitson and Darrell Bricker wrote about this phenomenon in their book Empty Planet: The Shock of Global Population Decline, and they attribute this to urbanisation. They write that the largest migration in human history has happened over the last century and it continues today as people move from the country to the city. In 1960, one-third of humanity lived in a city. Today, it’s almost 60%. Moving from the country to the city changes the economic rewards and penalties for having large families. Many children on the farm means lots of free hands to do the work. Many children in the city means lots of mouths to feed. That’s why we do the economically rational thing when we move to the city: we have fewer children.
People are a lot more mobile these days and therefore we would expect to see a lot more countries opening their borders encouraging younger migrants to move, in order to try combat ageing and increase their population of working age.
The investment case for both
Emerging markets generally will offer higher returns because of their high growth. These returns are subject to a lot more risk though, especially due to political interference as seen recently in Russia and China. Developed markets are a lot more stable but with stable growth and stable environment comes lower returns.
A well-constructed portfolio will have exposure to both. South African investors will by nature of their geographic location have a large percentage of their capital already exposed to an emerging market (South Africa) given where they may own property, where the majority of their retirement savings are invested and where discretionary money is sitting. For this reason, we generally encourage people to diversify their investments and get some exposure to the developed world where possible. Fortunately for all of us the offshore allowance on retirement savings has recently been increased. In time we will find that all of us should have just that little more exposure to the stable developed world, whilst maintaining a healthy exposure to the growth engine of the world – emerging markets.
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