In the last article, we began a discussion about the opportunities to be on the look out for in Emerging Markets.The discussion resumes today with the different anchors and drivers to be aware of in said markets.
It takes a long time to diminish the anchors and brakes to the development of emerging economies. Visionary and risk-taking leaders in both government and business have to work cleverly around them and invest enough on the driver side to gain traction. If a market is believed to have enough potential, such as China and India over the last 20 years, it is possible to gain traction (even though the brakes don’t diminish perceptively).
The following are factors that act as brakes and anchors on emerging economies:
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The Emerging Markets: What’s Next
Take a global tour with Mary across the ever-morphing landscape of the most important emerging markets and what to expect over the next 5 to 7 years to 2020.
Corrupt and Weak Governments
Historically, corruption has been a prominent feature of all Badlands. Some governments, (China, for example) are both corrupt and strong. Others, as in Africa, are corrupt and weak. Corruption is everywhere and comes in different sizes and shapes in all economies, including America. It is just a bigger barrier to development when the economies are nascent. Companies can fail because of corruption, dismissal of contracts, expropriation, and other unlawful practices. A strategy to deal effectively with corruption is critical for businesses venturing into these markets.
Poor Infrastructure and Institutional Voids
From roads and airports to legal systems and business services, the ease of doing business varies tremendously within a country or regional market. There is usually a dearth of local non-governmental organizations (NGO’s). Overlooking its impact on the potential success of your business model is a major pitfall to success.
Large Informal Economy
As an economy moves from developing to emerging, much of the economy that exists is an ‘informal’ one. The system of trade or economic exchange occurs outside of the state-controlled or money-based system, and it is not taxed or monitored. Transactions occur in cash, barter, self-help, odd jobs, and street trading. The less developed the economy, the higher the informal economy. It is a brake to investment in both hard and soft infrastructure and overall economic growth. China has reigned in its informal economy to about 13% of GDP, whereas Brazil’s has remained persistently high at around 40%.
High Unemployment of Young People
Youth unemployment is a global issue across all economies. It varies widely but can be as high as 50% in some emerging markets. For those that are educated, there is often a mismatch in what and where good jobs are available for educated and skilled workers. Such a gap creates an incentive for out-migration of the best and the brightest, while simultaneously generating social unrest and shortages of workers to execute on business strategy.
Crime and Extreme Poverty
These elements are usually present from the start. Although extreme poverty has diminished, its legacy and attendant crime will ebb away very slowly, remaining a risk factor. Crime is a nexus of corruption, illicit trade, and organized crime that heavily impact fragile states. With economic development comes better income distribution, which drives down poverty and crime rates. Often, that redistribution of income lags behind economic growth.
Scan, Scout, Steer
Emerging markets are inherently risky. It is critical to success to Scan, Scout, and Steer your way to the best opportunities for you. The need for assessment and due diligence cannot be overstated. Scan broadly to find the subset of countries that will provide the best match. Scout within them to identify the best cities and urban regions for your offerings, and steer towards the best.
Given the dynamism in the emerging markets, opportunities will accelerate over the next 10 years. Due diligence to identify them is essential as they will be distinctly different for every business.
Many Western global companies that have been doing business in the BRICs only need to expand their peripheral vision and look to these new city clusters. Finally, reaping some rewards, it will be hard for them to shift resources away from these larger, more mature markets. There is a strategic imperative, however, not to let the short-term cancel out the long-term. Most opportunities in the future will be in the rising smaller cities and in the new countries outside of the BRICs.