Emerging Financial Markets
Prof. J.P. Mei
R
1. Growth and Prosperity
2
V-Violence
AL- Incorrect Politically
AC-Adults only, Very Challenging
Historical Roulette 3000 BC, Kingdom of Egypt
2500 BC, The Greek Civilization
2000 BC, Shang Dynasty in China
500 BC, The Roman Empire
Middle Ages: China, Aztec in Mexico and the
Incas of Peru
1500 AD, Spanish Adventurers
1700-1900 AD, British Empire
1900 AD - ?, The United States of America
1. 3000 BC, Kingdom of Egypt
3
4. 500 BC, The Roman Empire
3
•The IFC Definition: Income less than $9,000
•21% GDP, 85% Population, 76% Area, And 11%
Market Capitalization in the World (1995)
•Higher growth rates & high mean returns in many
countries
•Time Taken to Double Per capita Output (10 years
but unstable)
The Definition Of Emerging Markets
The Emerging Markets
Emerging19%
Developed81%
Share of World GDP, 1996Share of World Population, 1996
Emerging84%
Developed16%
Share of World Equity market Capitalization
Emerging9%
Developed91%
Annual Real GDP Growth1987-1996
9.9%
8.5%
7.7%
5.1%
3.1% 3.0%
2.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
China Tiger Cubs Four Tigers India Latin
America
Japan United
States
Average Annual Returns for theTwelve Years Ended December 1998Source: International Finance Corporation. Returns include capital gains and dividends.
-1.3%
2.1%
5.1%
8.9%
10.4%
15.8%
16.6%
17.1%
19.1%
23.5%
25.4%
27.0%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Korea
Malaysia
Thailand
Singapore
Brazil
Taiwan
US
Hong Kong
Mexico
Greece
Chile
Argentina
Table. PRODUCTIVITY GROWTH
Time Taken to Double Per-capita Output (Selected periods)
Country Period Years
China 1977-1987 10
South korea 1966-1977 11
Brazil 1961-1979 19
Turkey 1857-1877 20
Japan 1855-1919 34
U.S. 1839-1886 48
U.K. 1780-1838 59
Sources: For U.K., Crafts 1981; for Japan, Moddison, for others, World Bank data
The Lucas Growth Model: The Puzzles of Economics Growth
Why growths differ across
countries? (India vs. China)
Why growths do not always
translate to stock (investment)
returns? (Korea)
Why capital flow is so small?
Which Countries Prosper?Per-capita GDP is expressed in terms of Purchasing Power Parities
(Source: Heritage Fountation)
-0.32%
-1.44%
0.97%
2.88%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
Free Mostly Free Mostly Not Free Repressed
4
Privatization and Incentives Studies have shown a high correlation between
economic freedom and growth.
Privatization of SOEs leads to great improvement
in efficiency and profits.
Low Tax Rates provide more incentives for
entrepreneurs.
Free trade and market opening allows
multinationals to leverage their strength,
outsourcing production, and expand their
markets.
Effective Corporate Tax RatesData Source: Goldman Sachs
0% 10% 20% 30% 40% 50% 60%
Hong Kong
Singapore
Thailand
China
US
Japan
5
An Educated And Low Cost Labor Pool
Low Literacy Rates Make Training
Less Costly.
Young and Energetic
Cost Of Labor Is Low
Technology Leap-frog Allows for
Dramatic Improvement in Efficiency.
Bulge BrackAsian countries, % of population aged 25-59
(source: Higgins and Williamson; * represents forecast)
25
30
35
40
45
50
55
Indonesia Malaysia Thailand Bangladesh Pakistan
1990-1992 2005* 2025*
World Labor Costs in U.S. Dollars per HourManufacturing Sector
1995 1997Cost (US $) Cost (US$)
Germany 31.88 27.80Japan 23.66 19.08France 19.34 16.91United States 17.20 18.17Italy 16.48 15.81Canada 16.03 16.24Britain 13.77 14.08Spain 12.70 n/aSouth Korea 7.40 4.29Singapore 7.28 7.05Taiwan 5.82 4.98Hong Kong 4.82 5.31Brazil 4.28 n/aChile 3.63 n/aPoland 2.09 n/aArgentina 1.67 n/aMalaysia 1.59 1.81Mexico 1.51 n/aCzech 1.30 n/aRussia 0.60 n/aThailand 0.46 0.39Indonesia 0.30 0.22China 0.25 0.33India 0.25 0.26
Source: Morgan Stanley Research (End of Year Estimates)
Domestic Savings And Foreign Capital Flow (FDI)
People are thrifty (high saving rates) in many markets. But high domestic savings can not fully cushion the flow of foreign capital.
FDI flows have increased rapidly. Equity flows are rising but not steady. The composition of capital flows are more
healthy (more private than public flows) but there is a problem of duration mismatch.
6
6
Foreign Investment
$-
$20
$40
$60
$80
$100
$120
$140
86 87 88 89 90 91 92 93 94 95 96 97
EQUITY
FDI
Economic Impact On Developed Countries
Raising demand of baby boomers in EM vs. falling demand in many western countries
Rising demand for western technology Badly needed infrastructure projects
create huge demand for capital and expertise.
7
Comparison of Population GrowthData Source: United Nations
Over the last five years, Japan’s population grew only at a miniscule 0.2% a year. In comparison, the population of other Asian grew at much higher rates, with some growing at over 2% a year.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Japan U.S. China Thailand Indonesia Mexico Brazil Hong Kong India Malaysia
Po
pu
lati
on
Gro
wth
Series1
Annual GDP Growth Projection 2000-2025Data Source: “Asia’s Bright Future” (Steven Radlelet and
Jeffrey Sachs ), United Nations, and Financial Times
7.0%
6.7%
6.3%
5.3%
4.2%4.4% 4.5%
4.1%
2.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
China Indonesia Malaysia Thailand HongKong
SouthKorea
Singapore Taiwan Japan
What can go wrong Paul Krugman: Little TFP increase. Past Success has little persistence (Brazil & Korea). Excessive public and private borrowing increase the
risk of financial crisis. Currency instability resulted from week financial
system. Overbuilding of production capacity leads to low
returns. (Real estate speculation) Strong special interest groups can block badly
needed reform. 8
Will Asia Follow Japan’s Fate?
Population growth create Population growth create demanddemand
Still in catch-up moodStill in catch-up mood Low taxes create strong Low taxes create strong
incentiveincentive Valuation reasonable before Valuation reasonable before
the crash (The bubble was the crash (The bubble was small)small)
Weak currency boost Weak currency boost competitivenesscompetitiveness
Good fiscal and monetary Good fiscal and monetary conditioncondition
Weak legal Weak legal institutionsinstitutions
New New development development strategystrategy
Market panicMarket panic US market US market
crashcrash
9
Dramatic Improvement in Current Account
Population growth create demandPopulation growth create demand Still in catch-up moodStill in catch-up mood Low taxes create strong incentiveLow taxes create strong incentive Small family business (except Small family business (except
Korea)Korea) Valuation reasonable before the Valuation reasonable before the
crash (The bubble was small)crash (The bubble was small) Weak currency boost Weak currency boost
competitivenesscompetitiveness Good fiscal and monetary conditionGood fiscal and monetary condition
-8.0
-5.1 -4.9
-3.4
-5.0
12.0 11.7
9.4
3.9 3.7
-10.0
-5.0
0.0
5.0
10.0
15.0
Thailand Korea Malaysia Indonesia Philippines
Cu
rren
t A
cco
un
t as %
of
GD
P
1996
1998
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