The Emerging Markets Handbook. Pran Tiku
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political system is ideal, but rather to realise that growth can happen in spite of almost any political system. That said, for trade and business relationships to flourish a minimum set of standards with regard to property rights, legal rights and transparency would be required.
Political stability and governance factors
Political stability and governance will be examined based on the following factors:
Economist Intelligence Unit (EIU) political risk
This metric takes into account a range of political factors that could affect a country’s ability and commitment to service its debt obligation and the potential to cause turbulence in the foreign exchange market. The ratings are measured on a scale of 0 to 100 with higher scores indicating higher levels of risk.
Alliant political and economic ranking
Alliant Insurance Services ranks each country on a 100-point scale with a higher score indicating lower risk. The rating focuses on financial losses arising from the following sources of risk: trade credit, currency inconvertibility and transfer, legal and regulatory risk, sovereign default and government breach of contract, expropriation and creeping expropriation, strikes, riots, and civil commotion, war and civil war, and terrorism.
Freedom from corruption
Freedom from corruption is measured using a scale of 0 to 100, where 100 represents maximum freedom. As this score rises GDP growth and per capita GDP also rises. Corruption reduces economic efficiency and creates insecurity in economic transactions. Countries with a lower level of corruption enjoy extra points of GDP growth.
Regulation freedom
Regulation freedom is measured using a scale of 0 to 100, where 100 represents maximum freedom. As this score rises GDP growth and per capita GDP also rises. While some regulation is required, excessive regulation can stifle industries and impede economic growth.
Governance ranking
Freedom of government is measured using a scale of 0 to 100, where 100 represents maximum freedom. As this score rises GDP growth and per capita GDP also rises.
6. Business conditions
Emerging markets have not always been regarded as easy places to start and run a business. Corruption ran rampant in many of these nations, where quotas and licences were doled out as political favours. The system was kept in place by the ruling class, protected powerbrokers, and crony capitalists. In the name of protecting local merchants from predatory capitalists, a system of perpetual inefficiency, waste and lack of innovation was created because of such little true competition.
Things are different in emerging markets today. There is a widespread realisation that in order to create jobs, avoid social unrest and raise living standards, there needs to be a free and open economy. Countries are making it easier for new entrepreneurs to start businesses, invest, innovate and compete. There is a general understanding, though not fully implemented yet, that economies need to be open for foreign investors in order to encourage competition, innovation and technology transfer.
Business conditions factors
Ease of doing business rank
Countries are ranked from 1 to 183 based on ten topics/sub-indexes covered in the World Bank’s ‘Doing Business’ report. The ten sub-indices are as follows:
1 Starting a business: Procedures, time, cost and minimum capital to open a new business.
2 Dealing with construction permits: Procedures, time and cost to build a warehouse.
3 Getting electricity: Procedures, time and cost required for a business to obtain a permanent electricity connection for a newly constructed warehouse.
4 Registering property: Procedures, time and cost to register commercial real estate.
5 Getting credit: Strength of legal rights index, depth of credit information index.
6 Protecting investors: Indices on the extent of disclosure, extent of director liability and ease of shareholder suits.
7 Paying taxes: Number of taxes paid, hours per year spent preparing tax returns and total tax payable as a share of gross profit.
8 Trading across borders: Number of documents and the cost and time necessary to export and import.
9 Enforcing contracts: Procedures, time and cost to enforce a debt contract.
10 Resolving insolvency: The time, cost and recovery rate (%) under bankruptcy proceedings.
Starting a business rank
Countries are ranked from 1 to 183 based on the simple average of rankings according to the following three criteria: procedures, time and cost.
Role of state-owned enterprises
State-owned enterprises tend to be beneficial during early stages of economic development of a country but continued patronage from the government that leads to domination and lack of private sector participation tends to hurt the economy in the long run. State-owned companies tend to be bloated bureaucracies and states have historically had an abysmal record at capital allocation.
7. Technology, innovation and infrastructure development
Technology and innovation play a unique part in the growth of emerging market nations. Technology that those in the developed world would have thought impossible just a few years ago is now a part of everyday life in emerging markets. Farmers in India who don’t have a working computer or even a landline are using smartphones for transactions. There is a process now underway to allow them to discover prices for their crops at the touch of a button before they take produce to the market.
Throughout emerging market nations, innovation centres are being set up by multinational corporations like GE, who are taking the latest technologies and creating new low-cost versions of these for wider use.
Infrastructure has historically been a major weakness in most emerging markets, but today it has become a top priority – whether in reducing power shortages, engineering faster trains, building better roads or implementing more efficient irrigation systems. The list of possibilities is endless.
A major infrastructure project is likely to take years to complete within emerging markets, along with billions of dollars in investment capital. This is more true of countries such as India, Brazil and most parts of Southeast Asia, Africa and Latin America. This also means several millions of jobs spread out over the course of several years. This not only includes trains, roads and bridges, but also power generation and grid development, along with water systems and sanitation in crowded urban centres.
This is truly a mammoth task and most emerging markets have recognised the fact that without suitable infrastructure investments they will be relegated to the bottom of the growth scale.
Technology innovation and infrastructure factors
Innovation
Most economists agree that innovation is the single most important determinant of long-term economic growth. There is also a clear statistical link between innovation and an increased standard of living. For emerging markets to grow and expand output they can either increase the volume of inputs or introduce technology to help workers use existing levels of input more productively. The ranks of countries in the Global Innovation Index as well as evidence of government policy that encourages innovation are examined.
Internet coverage and mobile
Broad