Clearly as the lists of “emerging market nations” and the wide range of incomes show, this grouping of economies is a very large, very diverse group. For our purposes in studying economic systems, we need to look at what these nations both have in common and how they are different. Beyond the fact of having a mid-range of income per capita, what most characterizes these countries is transition and a growing industrial sector. Typically these economies are countries that are newly industrializing or are re-industrializing. This means they are making dramatic transitions in their economic system. To a large extent, this definition of “second world” includes the countries that were classified in the old definition of “Second world”: the formerly communist countries. Russia, Hungary, China, Ukraine, Romania, and the other formerly communist nations are part of the new “second world” or “emerging markets” because their incomes are lower than developed nations and they are making the transition from a communist system to a more market-oriented, free-trade, capitalist system. But the new grouping of the “second world” includes many other countries making different transitions. Some, such as some Latin American countries are making a transition from a stagnant, oppressive class-based system left over from colonialism and centuries of land-based oligarchy. Another country, the world’s second-largest in population, India, is making a transition from being a poor colonial possession of Britain to having attempted a bureaucratic socialism in the 1950-1960’s to an advanced technology market-oriented services economy. And then there’s the example of China, a case all its ow

Since the key to the “emerging markets” is that they are all making a major transition, let’s take a look at what types of transitions are being made. I should note that each country is unique and faces its own transition challenges.



Industrial Communist, Central Planning to Capitalist Markets Russia, Poland, Hungary, Romania, Slovakia, Czech Republic, other former USSR republics
Collective Agriculture & Natural Resource-based Communism to Markets & Trade Ukraine, Russia, China, Romania
Poor subsistence agriculture to urbanized industry China, India, Indonesia, Malaysia, Mexico, Thailand
Former colonial or government bureaucratic control to markets & competition India, South Africa, Turkey
Government mercantilist policies and dependence on natural resource exports to modern industry South Africa, Brazil, Argentina, Mexico, Saudi Arabia, Persian Gulf States
Former class-, race-, or land ownership- based oligarchy to popular governments & urban markets Brazil, Mexico, South Africa, Argentina, Venezuela, Columbia

Role of Institutions, Integration, Culture, and History

Industrialization is the foundation of high incomes and wealth. After all, industrialization means that accumulated capital (machines, tools, factories, knowledge, technology) is applied to make labor dramatically more productive. In a poor economy, it is common to have most of the available labor devoted to just producing enough food for everybody. After industrialization, little labor is needed to feed everybody so that allows more labor to produce more income and the other goods we want. For example, in 2004, the average poor or undeveloped nation devoted 58% of its labor force solely to produce food to feed the population. Often that still wasn’t enough. Yet in the developed “first world” nations, only 3.2% of the labor force is needed to feed the population. In the U.S., each farmer produces enough food to (on average) to feed 99 people!. [source: – a wonderful research resource, check it out!]

It’s not possible to create an industrialized, rich economic system from scratch. All that can ever happen is to change an existing country’s system. That means starting with the existing history, politics, institutions, and culture. Each country has its own unique resources (or lack thereof) and its own degree of integration (trade) with the rest of the world. Each country has its own unique history of adoption of technology. There is rarely a shortage of leaders who want to either help another country to grow or to spark that growth within their own country. Unfortunately, most efforts at creating successful growth and development fail. One reason is that leaders often make the mistake of assuming there is one right path, or that what worked in another country will necessarily work the same way in a different country. These mistakes are compounded when leaders attempt to impose an ideology upon an economy as a “blueprint”.

Example: When Lenin and the Bolsheviks took power in Russia in 1917, they took Marx’s (and Kautsky’s) descriptions of how a communist system would work as the “master plan”. However, Marx had envisioned communism as the end stage of an evolution of the highly industrialized capitalist economies. In effect, he envisioned that industrial capitalism would inevitably result in increasingly monopolization and financial crises. Eventually socialism and then later communism would be established by a revolt of the under-paid workers that would lead to workers jointly managing factories and production. Critical to this possibility was that the workers would already have experienced the industrial world, understood it, and would have the education, knowledge, and skills to manage. Marx was writing about how communism would work when it came to a nation like Great Britain with a long history of industrialization. But, instead of a revolution in an advanced industrial economy like Great Britain, the communist revolution happened in Russia in 1917. In 1917 Russia was still essentially a feudal agricultural nation. Russia was closer to the middle ages than it was to Great Britain in 1917. Yet, Lenin attempted to implement workers’ management syndicates (called “Soviets”) in the 1920’s as Marx had described. He attempted to impose a “blueprint” on a culture and institutions where it didn’t fit. The attempt failed. The culture, knowledge, institutions, and skills simply didn’t exist. Within a few years, what industries existed were failing and production dropping because the soviets lacked the skills necessary. Marx had envisioned worker syndicates “managing” enterprises in Great Britain. But in Britain even the lowest workers were literate and educated. Not so in Russia in 1917. By the late 1920’s the decentralized workers’ Soviets decision-making was replaced by centrally developed, government-imposed, military-like “5 year plans”. That worked. The workers’ culture and institutions at that time understood taking orders under threat. Of course, by the time Russians had a couple generations worth of experience in an industrialized economy (fast forward to 1980’s), they no longer were as responsive to threats and central directives.
More Examples: In the next part of this course we’ll look at the less-developed nations, the poor. Throughout the second-half of the 20th century there have been many efforts to help or industrialize these nations, often in the form of “aid”. Most of theses efforts have all failed miserably. Some efforts have actually made these nations poorer. What many “aid” programs have in common is that they are based on some ideology or pre-determined “blueprint” of what a nation needs to do to grow.

Asian Tigers – Case Study in Adapting to Local Institutions/Culture

The collapse of the communist world, and with it the 3-part division of nations as free (1st), communist (2nd) or non-aligned (3rd), wasn’t the only prompt for a re-groupings of countries. In the period 1960-1990, four economies grew dramatically from very poor, undeveloped status to a very highly developed, high-income, industrialized status. These four were called the Asian Tigers: South Korea, Taiwan, Singapore, and Hong Kong. These four countries’ growth was notable not just because they grew so fast, but also because of the economic system/policies they pursued to do it. All four deviated in many ways from what was considered the “conventional wisdom” of the Western, developed nations. Each of these four sought to develop their own “path” based upon “Asian values” and not just the free-market capitalist ideology of the West. See the Wikipedia entry Asian Tigers for more explanation

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