Emerging economies have staged a remarkable recovery in the past year, embracing technological advan...
Emerging economies have staged a remarkable recovery in the past year, embracing technological advances and addressed some of the problems in the political, legal, banking and business environments, which precipitated the crises of 1997 and 1998.
We suspect investors continue to regard emerging markets as politically unstable, resource-based economies dependent upon exports of low-value commodities and subject to fluctuations in the international price of these products. However, that dependence has fallen sharply over the past 10-15 years, at the same time as political stability and consensus on the need for market friendly policies have grown. Critically, emerging economies have become increasingly technology driven as foreign investors have poured in funds and expertise.
Malaysia is a good example of a country that has re-invented itself over the past 15 years. Once a sleepy backwater, reliant on exports of commodities such as palm oil and rubber, it now derives around a third of its GDP from export-oriented manufactures. Indeed, it is now the world's ninth largest producer of information technology and telecoms hardware, according to the OECD. The economy has rallied strongly from the Asian financial crisis, expanding 5.4% in 1999 after suffering a 7.5% contraction in 1998. The government forecasts growth of 6% this year. Malaysian businesses are striving to upgrade their technological base to keep ahead of even cheaper manufacturers in countries such as Thailand and China.
The government has invested heavily in developing the Multimedia Super Corridor (MSC), designed to become an Asian Silicon Valley and to lead the rest of the country into the cyber age. Although several foreign companies including Siemens and Motorola have established bases in the corridor, many of the enterprises setting up in the MSC are small, home-grown firms involved in a wide variety of technology sectors ranging from software development to the provision of internet content. The MSC currently hosts 187 companies employing around 9,000 people, and a further 280 firms aim to establish bases there. But technological progress in Malaysia is not merely the preserve of the MSC. During the past six months, a host of companies have announced plans to overhaul their operations and embrace the new economy. While only around 10% of the country's households are connected to the internet, usage is doubling yearly.
Brazil and Argentina show the increasing political stability that characterises many emerging markets. Both have enjoyed a long period of civilian, democratic rule. Brazil has grown faster this century than any other major economy in the world, with the exception of Japan. It is now more than 15 years since the last military president left office and the current government is implementing fiscal reforms that could stabilise the economy in the long term. Brazil has made a remarkable recovery during the past year, with industrial production increasing by 13% in the year to February.
Although a large proportion of the Indian population remains in poverty, the country has made enormous economic progress. The development of the software industry epitomises the new spirit of enterprise in the sub-continent. In the space of just a few years, India has become one of the premier software development centres in the world, and the industry now employs 280,000 software engineers in 1,000 companies. In recent years, India's leading information technology groups have seen profits and share prices soar. At the end of September 1999 the market capitalisation of the IT industry amounted to $24.3bn, up from $13.6bn just six months earlier.
Foreign investors such as Texas Instruments, Cisco and Microsoft have all located in the country, and many bright young Indians now aspire to become software developers or computer engineers rather than doctors or lawyers. To quote India's prime minister, Atal Vajpayee, "IT is India's tomorrow."
Philip Ehrmann is head of emerging markets at Gartmore
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