BBC’s Hans Rosling: 200 Years of Remarkable Progress and a Converging World

Great video from BBC's Hans Rosling on 200 years of human progress. (hat tip Professor Don Boudreaux)

Key Drivers To Emerging Market Outperformance: Increasing Trends of Economic Freedom, Trade Openness And Rule of Law

US Global Investor's Frank Holmes enumerates six key drivers in favor of a secular emerging markets outperformance over the coming years.

Mr. Holmes writes(black bold highlights his, blue mine) :

1. Rapid Economic Growth: In the coming years, growth in emerging economies is expected to outpace that of the developed world. This growth is fueling an increase in household income in places like China and India where nearly 60 million people—roughly the combined populations of Texas and California—are joining the ranks of the middle class each year.
2. High Savings Rates in Asia: Despite rising consumption, households in emerging Asia save 17 percent of disposable income—that’s roughly four times what is saved in the U.S. and much higher than the developed world. These high savings rates allow them to meet the higher requirements for home ownership—many require at least 20 percent down—and have larger amounts of funds to invest in capital markets.
3. Urbanization: The world’s urban population is growing by more than 70 million people each year. China already has over 100 cities with 1 million people and is expected to have over 200 of them by 2025. This urban migration has overwhelmed existing infrastructure like roads, sewers and electrical grids. The buildout of this critical infrastructure will require vast amounts of copper, steel and increase demand for all commodities.
4. Desire for Social Stability: One main goal of emerging market governments to remain in power is to keep the public happy. They are doing this by increasing personal freedoms for citizens and providing them with opportunities to increase their quality of life. Many governments have found the key to social stability is focusing on job creation which establishes a path of upward mobility for citizens.
5. Natural Resources Wealth: Many of today’s most promising emerging nations sit atop some of the largest oil, metal and other valuable resource deposits in the world. Many of these nations have teamed up with private and/or foreign enterprises to bring these resources to market. Revenue generated through taxation and direct ownership allows for these governments to build infrastructure, create jobs and pursue other economic opportunities.
6. Corporate Transparency: A history of corruption and political turmoil has given way to higher standards of corporate governance in today’s globalized world. Though still far from perfect, the improved transparency and oversight has made important information available to investors and reduced uncertainty. By aligning themselves with international business standards and requirements, emerging nations will attract more foreign capital and better integrate themselves into the global marketplace.

I'd like to add three more important variables.

Although Mr. Holmes did mention in passing about the increasing "personal freedom", it must be emphasized that the respect for property rights serves as the root for economic freedom and trade openness which predominates all the above.

Not to mention the legal "rule of law" framework that underpins social institutions from which all these would be operating on.

In short, prosperity or capital accumulation emanates from economic freedom, trade openness and the rule of law, where all the others are simply offshoots or products of these 'sine qua non' underlying drivers.

Outside the incentives brought about by privatize profits and socialize losses, no rational person will invest in any country or markets where they see great risk from governments' arbitrary confiscation of investor's risk capital.

In other words, it isn't much of the issue of return on investments but the return OF investments.

As you can see below, the reason for the explosive growth in emerging markets has been because of the deepening depth of economic freedom and freer trade relative to the past.

chart courtesy of Moody's/ FT Alphaville

While Moody's expects a retreat, as the reason for the orange dot (arrow from FT Alphaville) I don't share the pessimism.

That's because many, among the emerging markets, have been realizing the benefits of trade, which has started to filter into the political process of many EM countries but whose impact comes at a different scale.


Yet much of the perceived pessimism has been due to the financial crisis which caused a dramatic retrenchment in global trade.

But this seems more of a the blip, though. Most of the disruption had been triggered by the Lehman event, which prompted for a near seizure of the US banking industry, which rapidly escalated across the world. To be sure, it hasn't been due to increased signs of protectionism (as pointed out in this space, example see WTO: Little Signs Of Protectionism).

And the swift recovery in global trade (chart courtesy of finfacts) appears to validate our analysis.

Hence, the trend towards greater economic freedom and trade liberalization in key emerging markets are likely to resume as the main trend and provide the framework as to why emerging markets are likely to outperform developed markets.

A Case Of Economic Freedom: Texas

Texas, the second largest US state next to California (in terms of GDP), has benefited from low taxes and low government spending (measure of government intervention) that has translated to economic resiliency even during the recent recession.

This from analyst Martin Spring: (bold emphasis mine)

``Interesting to see how successful the US state of Texas has been through policies such as cutting public spending, cutting taxes and implementing tort reform (limiting the damages courts may award in product, medical and similar liability cases).

``Texas has no state taxes on income or capital gains – yet it continues to run a budget surplus despite the recession.

``Between 2000 and 2007, more than half-a-million people moved into Texas, compared to the 1.2 million who exited notoriously high-taxed California.

``Last year Texas created more jobs than all the other 49 states combined – 70 per cent of net new jobs of the entire nation."

This from Bruce Kellison of IC² Institute (University of Texas)

``The real story behind the jump in GNP, then, might not be the dependency of consumers on government programs like “Cash for Clunkers” and the first-time home buyers’ tax credit, but the resiliency of firms to remain innovative, nimble, and competitive in a still-globalized economy. Texas was among the last states to feel the effects of the current recession, and many economists believe it will lag in recovery. But exports might mean Texas will lead, not lag, coming out of the recession." (bold highlights mine)

Some research sites for Texas: Tax Foundation.org, Texas Policy.com, Nelson Rockefeller.org

The Wal-Mart Effect: Wal-Mart Stores and Economic Growth

An article from Foreign Policy suggests of a strong correlation between the existence and growth of Wal-Mart Stores and national economic growth.

This from Foreign Policy (all bold highlights mine)

``When India's first Wal-Mart opened this summer in Amritsar, the response was mixed, with detractors fearing that big-box stores would eventually crowd out India's fabled "wallah" culture. What no one remarked on, however, was that Wal-Mart's debut in a country is a bellwether for future growth. Indeed, Wal-Mart has started operations in 15 countries since 1991, and 13 of them have had boom economies, with an average of 4.4 percent annual growth since Wal-Mart arrived. Over the last five years, the economies of Wal-Mart countries outside the United States have grown 40 percent faster than the world average.

``So what's going on? Does the ability to buy giant bags of Froot Loops at cut-rate prices inspire economic growth? More likely, Wal-Mart is simply a smart, cautious investor. "Wal-Mart chooses to go places with a sizable middle class," says Nelson Lichtenstein, a historian who just published a book on Wal-Mart's rise. And Wal-Mart's attention to middle-class growth could pay off for the company in the future.

``The portion of the global middle class that lives in the developing world should rise from 56 percent in 2000 to 93 percent in 2030, according to the World Bank. Next up for the Wal-Mart effect, Lichtenstein says: Russia and Eastern Europe. Picture the new global bourgeoisie outfitted with cheap hibachi grills, extra-durable puppy toys, and energy-efficient minifridges, and you've got a glimpse of the coming Wal-Mart revolution."

Additional comments:

The article focuses mostly on the demand side perspective: global middle class growth.

Here is our complimentary view from the supply side:

Since Wal-mart offers international products at the most affordable prices, this indicates that consumers have more options to choose from, and is likewise backed by greater purchasing power from competitive pricing, i.e. more products that can be bought.

Since Wal-mart offers its consumers access to the world products, this also implies that global competition enhances pricing, product quality and the pool of products available for sale.

This also means an expanded internationalization of trade.

In short, the Wal-mart effect can be construed as representative of the globalization dynamics. (Hat tip: Mark Perry)