It is almost impossible to find a business leader in the global marketplace who does not operate, or at the very least, is not exploring opportunities with or within emerging market countries. Even those entrepreneurs who prefer domestic markets experience competition from companies based in these regions.
During the last 20 years, the global business world has gone through drastic but mostly positive changes. In the 1980s, international business was essentially an exclusive club of the 20 richest countries. This changed as dictatorships and command economies collapsed throughout the world. Countries that once prohibited foreign investment from operating on their soil and were isolated from international cooperation are now part of the global marketplace.
I remember well when, in 1987, the first $80 million of foreign origin was allowed to be invested in the former Soviet Union. So-called "patriots" accused Mikhail Gorbachev of selling their motherland. Twenty years later, in 2007, Russia received about $43 billion of foreign direct investment, and emerging market countries received about 40% of the $1.5 trillion FDI worldwide.
All strategists, analysts and executives try to understand and evaluate emerging market countries. This process is complicated by the pervasiveness of misleading statistics and studies. Of course, no one is intentionally creating misleading studies. They are the result of a lack of a real definition of emerging market countries and the absence in all Bretton Woods Institutions (The World Bank, International Monetary Fund and economic branches of the U.N.) of a clearly defined category of these countries.
Statistics on emerging market countries contradict each other from report to report, sometimes within the same organization. Even in an institution as widely respected as the IMF, the list of countries considered to be emerging markets is not consistent. As a result, the statistics in one table are not comparable to other tables. Executives who are not aware of this problem struggle to make sense of the strange economic implications from an analysis of these statistics.
For example, in one table from the IMF's Global Financial Stability Report, emerging market countries are listed by continent and include "Other emerging markets and developing countries ... together with Hong Kong, Israel, Korea, Singapore and Taiwan Province of China." In another IMF report, the World Economic and Financial Surveys, the category "Advanced Economies" includes several countries that in the previously mentioned report were considered emerging markets, such as Hong Kong, Taiwan, Korea, Cyprus and Israel. The same category also includes Portugal, Greece, Spain and Ireland, which many agencies still consider to be emerging markets.
Later in the same report, some countries, which were previously classified as emerging markets are evaluated as developing countries, including those that are obviously emerging markets, like China, India and Turkey. These emerging market countries are included in the same category, as all sub-Saharan African states despite the fact that many of the sub-Saharan countries clearly belong to the category of developing countries. Some are definitely emerging markets, like South Africa, for example, but many of them are still underdeveloped. This is a further illustration of the IMF's lack of a clearly defined categorization of countries.
In the same report, a different category appears later--countries in transition. This category includes Central and Eastern Europe, the Commonwealth of Independent States (CIS) and Mongolia. It is not clear why Mongolia is grouped with these countries. The same mix of countries with different levels of economic maturity (underdeveloped, developing and emerging market countries) in the same category can be found in the majority of U.N. reports. It is even found in the widely respected surveys published by the Economist Intelligence Unit.
This mix of countries arbitrarily blurs the distinctions between emerging market, developing and underdeveloped countries. Inconsistent categorization makes all the statistics from these surveys inaccurate. Actual emerging market economies often appear to be less efficient than they are in reality, mostly due to an overestimation of their population. This falsely reduces their productivity of labor and gross domestic product per capita.
Unlike emerging markets, developing and underdeveloped countries still need special attention from international aid agencies to prevent starvation, mass disease and political instability. Developing countries need to improve their education systems and create a strategy to begin their transition to the global emerging market. Companies from developed and emerging markets should play an important role in this process. Companies from emerging markets are especially crucial, as they have a great deal of experience operating in conditions of non-developed economies.
In order to address the necessity of business leaders and strategists for a clear understanding of what an emerging market is, I recently finished a study that defined the major characteristics that all emerging market countries have had or will have at some stage during the processes of economic maturation and development of free markets.
A critical mass of these characteristics creates a comfortable and attractive environment for global business, foreign investment and international trade. Based on my study, an emerging market country can be defined as a society transitioning from a dictatorship to a free market-oriented economy, with increasing economic freedom, gradual integration within the global marketplace, an expanding middle class, improving standards of living and social stability and tolerance, as well as an increase in cooperation with multilateral institutions.
By this definition, an analysis of all 192 country-members of the U.N. leads to the selection of 81 countries that can be categorized as emerging markets. The role of emerging market countries in the world is now difficult to overestimate. The territory of these countries occupies 46% of the earth's surface, with 68% of the global population. These economies account for nearly half of the gross world product, and attracted about $600 billion of foreign direct investment.
Multilateral institutions can not ignore the need for clear definitions of emerging markets, as well as of developing and underdeveloped countries. It is important not only for the global business community but also for the poorest people and countries, who need special attention from political and business leaders of the world.
Dr. Vladimir Kvint is president of the International Academy of Emerging Markets.