Developing countries experience such rapid growth for several reasons. First, they invest in imported technology that allows them to be more productive. This is more or less copying the know-how of developed economies, skipping over the painful process of reinventing the wheel. Second, their labor costs are lower relative to developed countries, allowing them to produce labor-intensive goods more cheaply. Third, they are able to tap into a population working in inefficient or non-industrial sectors of the economy, such as agriculture. Fourth, they operate export-dominated economies that emphasize capital-intensive growth.

TUTORIAL: Stock Basics: Introduction

At some point, emerging markets will have picked all of the low hanging fruit that has provided them with such consistently high GDP and productivity growth rates. The "easy wins" will be exhausted as rural labor sources are utilized and investment in more urban factories leads to saturation. As the supply of migrant or cheap labor declines, high levels of demand will increase wage rates. This will reduce the competitive advantage enjoyed by many export-driven industries. This is especially the case in industries dominated by high volume orders with low costs. (For related reading, see What Is An Emerging Market Economy?)

Strategies to Work With
Luckily for emerging economies, a wealth of historical perspective can provide some potential strategies to keep growth alive:

  • Investment in infrastructure, such as roads, should continue in order to connect industrial centers to more far-flung internal markets.
  • Regulatory institutions protecting companies that innovate must be developed, signaling to firms that creating products and services able to be patented is a viable investment.
  • Investments in education a wider proportion of the population, as well as the development of higher education institutions linked to science and industry will help develop the next generation of entrepreneurs.
  • Monetary policy will eventually have to allow currencies to fluctuate with market conditions more, as an emphasis on keeping exchange rates artificially low distorts the economy and pushes capital to the same industries as before.
  • Businesses and consumers will have to be given greater access to credit, which will help develop a domestic market.
  • Emphasize the development of industries outside of commodities.
  • Governments will have to loosen the top-down approach to directing the use of capital and development of industries, allowing smaller operations to flourish and limiting continued investment in industries with low returns.
  • Domestic markets will have to be open to a level of international competition, removing implicit government protection on businesses that cannot compete or use capital efficiently.
  • Encourage institutions that fight corruption.

The End of Fast Growth
Slowing economic growth is more likely to stem from maturation than from lack of capital investment or access to labor. In order to navigate out of the doldrums of the middle-income trap, emerging markets must pursue structural and financial reforms in order to transition to high-income, innovation-driven economies. The development of strong financial institutions and markets will be the key to overcoming the decline in GDP growth that accompanies an aging economy, as these will improve the way in which capital is employed by sending money to where it will be most productively used.

Many emerging markets have been fueled not only by high demand for exports, but also by high savings rates from their populations. This has provided a cheap source of development capital, and has allowed some countries, such as India and China, to bypass international capital markets for bond sales. Based on 2010 numbers, gross national savings, calculated as gross national income (GNI) less consumption plus net transfers, is higher in the BRIC economies - Brazil (15%), Russia (28%), India (28%), and China (51%) - than it is in the United States (10%). (For related reading, see Should You Invest In Emerging Markets?)

Making the Jump
In order to make the jump from savings to consumption, countries need to encourage the development of domestic industries providing products and services for the home population. Aggregate demand, which is a measurement of demand for a country's goods and services, will need to increase as a function of emerging market GDP. Household consumption as a percentage of GDP (2010) is lower in Brazil (64%), Russia (51%), India (63%) and China (38%) than it is in the United States (71% in 2009). A reliance on commodity exports has depressed Brazil and Russia's household consumption as a percentage, but high savings rates are hurting China. According to the IMF's World Economic Outlook report, emerging and developing economies are projected to have real GDP above 6% through 2016, with developing Asian economies growing above 8%. China is expected to grow above 9%.

The Bottom Line
There is no singular cure-all for emerging markets suffering from slowed growth. Some need to increase consumption (China) while others need to reduce consumption and increase saving (Brazil). Regulations will take time to come into their full effect, and most importantly the business environment needs to provide the resources to start new businesses quickly and let them fold if they are no longer competitive. It is possible that competition for capital, whether from international or domestic sources, will be the driving force that pushes emerging markets into the next level.

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Fundamental Analysis

    Is Brazil Currently in a Depression?

    Find out if Brazil, the world's seventh-largest economy, may have finally slipped into an economic depression, and learn the reasons why.
  3. Stock Analysis

    3 Reasons to Invest in Frontier Markets in 2016

    Learn why investing in frontier markets will be a great long-term investment as these markets grow in ways that will propel them to success in the future.
  4. Investing News

    Brazil's Latest Export To China: Soccer Players

    Why are Brazilian soccer players moving to China?
  5. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  6. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  7. Investing News

    How China's Economy is Now Like America's

    China's economy could take the global economy down with it; why that might be good news in the grand scheme.
  8. Stock Analysis

    5 Risks Emerging Markets Equities Face in 2016

    Learn why investing in emerging market equities carries inordinate risk in early 2016 based on the financial deterioration in their economies.
  9. Economics

    Why the Chinese Economy Impacts the U.S. So Much

    Here's how the Chinese economy, the second-largest in the world, impacts the United States.
  10. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  1. Is Malaysia a developed country?

    Despite undergoing rapid economic development over the past five decades, Malaysia is not considered a developed country, ... Read Full Answer >>
  2. Do mutual funds have CUSIP numbers?

    The Committee on Uniform Securities Identification Procedures (CUSIP) number is a standardized identification system used ... Read Full Answer >>
  3. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  4. Why should an investor include an allocation to the telecommunications sector in ...

    An investor should include an allocation to the telecommunications sector in his portfolio, because telecom offers an investor ... Read Full Answer >>
  5. What portion of the telecommunications sector will benefit most from continued growth ...

    The portion of the telecommunications sector that is projected to benefit most from the continued growth in the use of cellphones ... Read Full Answer >>
  6. What is the difference between a greenfield investment and a regular investment?

    A greenfield investment is a particular type of investment where an international company begins a new operation in a foreign ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center