Do emerging markets need the West?

By bne IntelliNews June 30, 2010

Tim Gosling in Moscow -

The economic crisis has put emerging markets in the driving seat of the global recovery and the end of the global economic model that recognizes the US and Europe unquestionably at its core is coming more and more under discussion - nowhere more so than in the countries of Brazil, Russia, India and China (Bric).

Saddled with debt and with limited growth potential to pull themselves out of the mire, western economies are losing their starring role in the world as emerging markets increasingly climb into the driving seat.

As if that wasn't enough, these emerging markets appear increasingly confident that they don't actually need the West at all. Instead, we're seeing the Brics and their ilk recognize that with their experience operating in emerging markets, complementary growth potential and innovation of new technologies and infrastructure, they have much more to offer one another.

A report from HSBC warns that unless western companies pull their finger out, they now run the very real risk of being left out of the world's economic growth engines. That would represent a seismic shift in the global economy. "In India, two-thirds of exports now go to markets other than the US and Europe," writes Alan Kier, global co-head of commercial banking at HSBC. "Last year, China became the largest importer of Brazilian goods. China has already become the largest trading partner for Africa. These markets are full of new ideas, refuse to be constrained by traditional business perceptions, and are innovating new business models which are leapfrogging the technology and infrastructure which has served the West so well."

It's a trend that many of Russia's biggest businesses are well aware of, and has been a hot topic at Renaissance Capital's 14th Annual Investor Conference at the end of June. Having expanded its network into Africa and the Middle East in recent years, Rencap also announced on June 28 it has opened an office in Hong Kong to facilitate investment flows between Russia and China.

First and foremost, emerging markets players know how to operate in emerging markets. They are used to dealing with corruption and companies have spent their lives cultivating the political contacts that carry so much weight. As HSBC points out, they are also used to working alongside "the rise of the state capitalist model and the rejection of the Washington Consensus principles on which Western European economies have been built."

Whilst not immune to fear then, decision-making at board level is far less informed by it due to this familiarity with such conditions. Companies live with such risk anyway, and have strategies for, and experience in, dealing with it. This means they can spend less time worrying and concentrate on the opportunities instead.

The ambition of Mikhail Fridman's Alfa Group to establish a "Vodafone of the east" based around its mobile operator VimpelCom is an illustrative case. The plan was delayed for years by a fight with VimpelCom's joint-owner, Norway's Telenor. Whilst Alfa's eventual success in enforcing its will on Telenor only raised concern for western investors over operating in such markets, Alfa is now pushing forwards with merger talks in Africa and Asia.

Swapping growth

Emerging markets also have growth opportunities to swap. Consumers in China and India spent much of the crisis helping global growth figures avoid total collapse. Russian consumers are an enormous pool of potential as income and credit expands in the country. Finding growth in the West - US consumers already borrow 100% of what they will earn in a year - is a much trickier search.

At the same time, "we're moving from a homogenous world with global financial hubs to one with regional centres," suggests Troika's head of global markets, Peter Ghavami. "There are many capital flows now that are bypassing the likes of London and New York."

This was a major motivation in the tie-up between Russia's Troika and Standard Bank late last year. "We're a single market player and need to be part of a global network; and 80% of growth over the next 20 years is going to come from emerging markets," says Ghavami. "Standard Bank aims to be a leading emerging markets player, and in that strategy, Russia must be a cornerstone."

HSBC concludes that, "In the context of the changing macro-economic landscape, the risks of doing nothing [for the West] because it is too risky, increasingly look like outweighing the risks of action."

But is it too late? The open question is: what do the emerging economies need the West for?

Certainly in Russia, President Dmitry Medvedev is appealing for foreign knowledge capital to help him modernize the oil dependent economy - but maybe when taking the plane to Silicon Valley last week he was looking in the wrong place?

HSBC seems to think so, suggesting that, "investment in education and R&D is transforming Asia's skills base. The model where the West did the development work and the East took care of low value production is dead. In future, forward looking businesses will take advantage of the growing skills of Asian workers."

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