You are calling for redefining emerging markets. Why is that?
The question of what constitutes an emerging market has haunted me for decades. Since 1989, the World Bank has defined an emerging market as a country with gross domestic product (GDP) per capita of $13,000 or less. But GDP is simply a “wealth” statistic. A country with $12,999 in GDP per capita is very different from one with $1,500. Thus a new, multi-dimensional method of classifying emerging markets is called for, one that takes into account a cluster of different indicators to produce a ranking of countries’ socioeconomic maturation.
Can you explain the basis of your research?
I started asking myself, besides GDP, what are the other dimensions that define a country’s maturation? Are there more objective ways to analyse and cluster countries? Are not countries more nuanced than the blunt descriptions “advanced” and “emerging”? My gut feeling was yes, but I needed an objective, “big data” framework to answer these big questions. So last year I probed these questions using Ward’s Method, a quantitative approach that clusters things based on the “minimum variance” of certain factors – that is, grouping things whose qualities were statistically most similar.
My idea was to batch approximately 100 countries (both advanced and emerging) into 10 clusters. Group 10 would have the highest scores awarded for nine specific criteria, denoting more mature countries that may be more resilient to potential shifts and shocks. Group 1 would have the lowest scores, signifying those countries that are less mature and more likely to be vulnerable to an array of risks. The members of each group were arrived at by assigning numerical values to each country reflecting the nine distinct categories. Thus a country with a high per capita GDP would be given a high score in the category concerned with this metric. The other eight categories include two for population size and competitiveness, three for credit ratings, stock market penetration and currency valuations, and three for health, education and political climate.
To offer a view on the changes that took place over an important decade of globalisation – five years leading up to the 2008 crisis and five years following it – we compared year-end 2003 and year-end 2013.
What has your research revealed?
First of all, it was fascinating to see that the numerical scores from five economies didn’t cluster well with any of the 10 cluster groups because of outsized endowments in one or more areas. These countries included:
- U.S., because of its large and wealthy population
- China, due to its huge population
- India, because of its large population
- Hong Kong, due to high wealth, strong financial development and small population
- Qatar, an outlier because of its wealthy and small population
Second, most “emerging” countries rose up the ranking during the decade while some “advanced” economies slipped. Among the big advancers were Ghana, which climbed from Group 1 to Group 5, while big losers included Iceland, Ireland, Italy and Spain, which all slipped from Group 10 down to Group 8. The two big surprises came from the Middle East, with Kuwait and the United Arab Emirates dropping from Group 8 to Group 4.
China’s dramatic rise is also noteworthy. It has a credit rating similar to or better than most advanced economies (AA- Standard & Poor’s), while also having the world’s second-largest stock market and an economy that ranks second in size to the U.S. in nominal terms. These dimensions – together with the fact that its economy is almost as large as all other emerging markets combined – argue for removing China from its current classification as an emerging market and creating a separate category for it alone. The only country that is remotely comparable to China is the U.S.
Overall, the world appears to have begun to converge. Both the developed, western economies and “emerging markets” have shifted towards more middle ground.
Where do we go from here?
One insight the study throws up is that it may be instructive to view the development of countries as a continuum in which each stage of socioeconomic progress may not be perceptibly different from the others, though the extremes are quite distinct. Indeed, because many “emerging” countries have closed many socioeconomic gaps and converged with “advanced” ones, it is now tough to say where “emerging” ends and “advanced” begins. Clearly we need more categories of countries than two like “advanced” and “emerging.”
What’s the take-away for investors?
The so-called emerging markets are now generally more mature than they were a decade ago and too big for investors to ignore. Today, they contribute more than 50% of global output on a purchasing power parity basis; most have robust “investment grade” credit ratings and have fast-growing financial markets.*
*Source: Loomis, Sayles & Company Research, as of August 17, 2015.