Issues of Emerging Markets

“Emerging market nations” face many challenges, but they also have some advantages. Let’s look first at the advantages and then the major challenges.


  1. Any of the “emerging market nations” have the advantage of being a “follower” when it comes to industrialization. They can copy existing technology. The how-to’s of how to create or operate a large industry have already been discovered and implemented in the older, more developed nations. This is particularly important when it comes to technology and factories. Consider the steel industry. In the U.S., Britain, and Germany, the steel industry developed over many decades, even a century. The processes and technologies used had to be invented (cost of R&D), tested, experimented, and finally through a process of marketplace competition, a winner selected. This process is long and costly. It results in much wasted investment (consider the factories built with technologies that didn’t work out). Present-day emerging nations, however, have the advantage of selecting the best already proven technologies based on the experience of the developed nations. It means growth and development can proceed faster because the best technology can be copied. It’s kind of like taking the freeway for your first journey to “rich-ville”. You get there much faster than the pioneers who had to first blaze the trails, cut the trees, pave the roads, and build the freeway in the first place.
  2. Low labor costs allow a starting point. Most (not all) “emerging market nations” have large populations able and willing to work (at present) for low wages. This allows the “emerging market nation” to focus initially on labor-intensive industries such as clothes-making, small consumer items, and electronics-assembly. The wage rate is often so low that it allows them to compete favorably against high-wage producers in developed countries, even when those high-wage producers have a productivity advantage from capital investment. It should be noted that this low-wage strategy only works in the early stages. As the “emerging market nation” grows itself and becomes richer, wages will rise and it will eventually be undercut by other poorer nations. Thus, Japan of the 1950’s was undercut by South Korea/Taiwan in the 1970’s which was undercut by China in the 1990’s-2000’s, who will no doubt be undercut by somebody in the future. The low-wage, labor-intense strategy does allow a start on industrialization. It also provides a nation with the beginnings of the institutions and experience necessary for more complex and sophisticated industries and technologies later.
  3. The ideologies of the developed world facilitate investment and trade, particularly the free-markets/financial capitalism/global business paradigm. By agreeing to the terms of the GATT/ WTO treaties, a country can gain access to broad export markets in the developed nations. Often the corporations of the developed world will facilitate and promote the nation’s development. (think Wal-Mart and China). Indeed, global corporations and banks from the “first world” are so eager to be part of these potentially huge markets, they bring large amounts of capital, knowledge, expertise, and technology. When the “first world” was industrializing, it wasn’t always so easy to cross-borders.
  4. A core of highly educated engineers, scientists, managers, and leaders is often available. China has always had a core of highly educated leaders at its helm. It is an ancient civilization. One benefit for India of their history as Britain’s colony (there were many disadvantages, too), is a high proportion of English-speakers and English educated leaders. English has become the lingua franca of the global economic community, so it has facilitated India’s growth in technology-based services such as computer programming. Russia, of course, had a very large number of highly educated scientists and engineers, dating back to the USSR


  1. Large poor populations demand and require large resources, too. This is particularly true when the poor population is rural and based on subsistence agriculture or mining. These populations must be fed, housed, provided medical care, educated, and moved to urban areas to support an industrial economy. This has been a major challenge for Brazil, India, China, and Mexico.
  2. Geography. Historically, it has been easiest to grow, industrialize, and trade if your nation was on an ocean with numerous ports (preferably the North Atlantic), located in a temperate zone (the evidence is clear, but its not clear why this is so), and located with many neighbors who were also either rich or growing fast like yourself. Historically, if your nation was in the tropics, or land-locked, or on the Pacific or Indian oceans, or just in the Southern Hemisphere, your chances of growing industrially were low. Obviously a nation can’t move itself or change it’s geography (although heaven knows Imperial Russia tried for centuries to conquer and annex a warm-weather port!). It has to develop a strategy to overcome the limitations. Fortunately for today’s “emerging market nations”, technology in the form of air travel, the Internet, and electronic communications is helping.
  3. Demographics. Getting the right size and age of the population is important to industrialization, but for obvious reasons, very difficult to manage. If the population is too young, then there will be a huge need and demand for unskilled jobs – a potential resource for a low-wage strategy. But a large population (especially a growing one) can also mean too many mouths to feed. This could require devoting more resource to food and less to industry (it could be more labor for farming, or more $$ to purchase import food instead of machinery). But at the other end, too few people is an obvious disadvantage and having too old of a population is too. Currently, Russia is struggling with a very low birth rate (as is Japan and much of Northern Europe). These countries also face populations that are sharply aging. A major challenge in coming years for Russia will be finding enough workers. Interestingly enough, this could also prove a challenge for China in another 20 years. China implemented a strict one-child per family policy in the late 1970’s. Prior to then, it had very rapid population growth. Well the people born during the population boom years are now prime-age workers – the work force that is fueling their growth. But in another 10-20 years, they will start retiring. Then, the low-population rate since 1980 will mean a possible shortage of workers. Granted it is difficult to think of shortage of workers in a nation of 1.2 trillion people, but supply and demand is relative.
  4. Legal institutions. One of the greatest challenges of the formerly communist nations has been the creation of institutions to support financial capitalism and markets. Centrally planned communist countries had little need for contract laws, civil courts to handle trade disputes, laws for corporations, banks, or even court records of who owns what property. These institutions have all had to be created, people have to learn them, and the people have to accept them as legitimate. Much the same is occurring in China. In many of the poorer and emerging market nations of Latin America, a major challenge is the lack of legal title to land. People whose families have lived on and farmed a particular piece of land for decades or even centuries don’t have legal title to the land. The titles simply don’t exist. Without proof of ownership, these people cannot borrow to invest to improve the land, increase productivity, and grow output. Growth gets stopped cold simply from a lack of legal records.
  5. Culture, customs, diversity, and religion. Although diversity can be an economic advantage, economic history also shows it is frequently a disadvantage. The reasons are complex, but essentially amount to political conflicts. When a nation is ethnically or religiously diverse, especially when those different groups are sharply opposed to each other, there is a great tendency for conflicts over distribution of income, wealth, and power to take center stage. To keep peace, income, resources, and assets may not be distributed optimally to achieve the fastest growth. In other words, sometimes arguments over how to slice the pie prevent efforts to grow the total pie. In other nations, deeply ingrained cultural attitudes affect the ability and direction of investment and growth. India and China make a particularly interesting and sharp contrast on this issue.

What to Look For

In your assignments for this unit and the next, you’ll see many stories. In the next segments of Commanding Heights, for instance, you’ll see segments on Russia, China, India, Bolivia (actually more of less-developed country), Chile, Thailand, Poland, and others. In the Angus Maddison book you’ll read about how trade between Asia and the developed nations of Europe. I have some other selected videos you will view.

In each case, I want you to think about the above list of advantages and challenges. How did each country experience these? How did they react? Were they able to build on the advantages? Could they overcome the challenges? If so, how? Did it work? Why not?

Later in this course you will develop a profile and analysis of countries you choose. Think of this as practice looking at and learing about another nation’s system, it’s challenges, and it’s performance. Develop your own insights. At the beginning of this course we studied a significant amount of facts, data, ideas, concepts, and definitions. I don’t expect you to memorize or be able to spout back lots of facts about these many nations now. What we’re doing now is shifting more to observing different nations as examples of various issues and patterns.

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