emerging and frontier markets

Emerging and Frontier Markets

BEFM013: Investment Instruments

Dr. Rohit Sonika

Business School

University of Exeter

17th October 2015

E. Ang 000347

J. Xiao 017209

Y. Abbas 002415

Z. Liu 012946

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Abstract

In this essay, we will provide an overview of three different kinds of economies:

Developed Emerging, and Frontier Markets. We will then look at a small selection

of each kind of economy, state their basic characteristics, and offer a breakdown

of each country’s economic sectors. Finally, we will compare and contrast the

markets, to illustrate the differences between each type of economy. Kindly note,

that we have included the three economies of developed countries to set a

benchmark to be compared to the emerging and frontier markets.

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Table of Contents 1. Introduction ............................................................................................................................................... 5

2. Emerging Markets.......................................................................................................................................... 6

2.1 Why Emerging Markets are Appealing to Investors ................................................................................ 7

2.2 Risk in Emerging Market .......................................................................................................................... 8

2.2.1 Political and Sovereign Risk .............................................................................................................. 8

2.2.2 Volatility ............................................................................................................................................ 8

2.2.3 Liquidity ............................................................................................................................................ 9

2.3 China ........................................................................................................................................................ 9

2.3.1 Business Culture and Issues ............................................................................................................ 10

2.3.2 Market Sectors ............................................................................................................................... 11

2.3.3 Trade Balance ................................................................................................................................. 11

2.4 Turkey .................................................................................................................................................... 12

2.4.1 Business Culture ............................................................................................................................. 12

2.4.2 Market Sectors ............................................................................................................................... 13

2.4.3 Trade Balance ................................................................................................................................. 13

3. Frontier Markets .......................................................................................................................................... 14

3.1 Why Frontier Markets Show Appeal ..................................................................................................... 15

3.2 Risk Analysis for Frontier Markets ......................................................................................................... 16

3.2.1 Political and Sovereign Risks........................................................................................................... 16

3.2.2 Volatility .......................................................................................................................................... 16

3.2.3 Liquidity .......................................................................................................................................... 17

3.2.4 Corruption ...................................................................................................................................... 18

3.3 Nigeria ................................................................................................................................................... 18

3.3.1 Market sector ................................................................................................................................. 19

3.3.2 Business culture .............................................................................................................................. 19

3.3.3 Investment Characteristics ............................................................................................................. 19

3.4 Saudi Arabia ........................................................................................................................................... 20


3.4.2 Market Sector ................................................................................................................................. 21


3.5 Croatia ................................................................................................................................................... 23


3.5.2 Market Sectors ............................................................................................................................... 23

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3.6 Concluding Frontier Markets ................................................................................................................. 25

4. Developed Economies ................................................................................................................................. 25

4.1 Norway .................................................................................................................................................. 25


4.1.2 Market Sectors ............................................................................................................................... 26


4.2 The United States of America ................................................................................................................ 27


4.2.2 Growth Engines: Research, Development, and Entrepreneurship................................................. 29

4.2.3 Components of the Economy ......................................................................................................... 29


4.2.5 Capital Flows ................................................................................................................................... 31

4.3 Japan ...................................................................................................................................................... 31

4.3.1 Market Sectors ............................................................................................................................... 32


5. Compare and Contrast................................................................................................................................. 35

6. Conclusion ................................................................................................................................................... 38

References ....................................................................................................................................................... 40

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1. Introduction

The global economy has classified its markets into two main categories: developed markets, and

emerging markets. Before the term emerging markets was coined, these countries were referred to

as Less Economically Developed Countries ‘LEDC’. The term LEDC did not have a positive

connotation, and it neglected to describe the potential of these markets, and thus, by the 1970s, the

name was changed to Emerging Markets (NASDAQ). Those two market classifications

“Developed and Emerging” have been put in place based on certain economic characteristics each

individual country enjoys. For example, developed markets are characterized by their high credit

worthiness, their regulatory authorities’ active role, free and developed trade markets, and

transparency of market information and trade reporting process, to name a few factors (FTSE, n.d.).

The remaining markets were labelled as emerging markets. With this formation many economies

that enjoyed different qualities, some more advanced than others, were pooled under the same

category. In the 1990s, a member of the International Finance Corporation, Mrs. Farida Khambata,

came up with the term ‘Frontier Market’ (NASDAQ, n.d.), which would separate emerging markets

into two categories, emerging and frontier markets. The classification of these countries was based

on their market structure and potential.

Now, emerging markets are known for their established financial infrastructures, and are constantly

progressing towards becoming developed economies (Investopedia). Markets that are classified as

emerging share the following characteristics: They have established regulatory bodies and market

exchanges, and liquidity in both debt and equity markets (Investopedia). Emerging markets are also

considered an indicator of the world’s economic growth, because they hold around 80% of the

world’s population (Investopedia). Markets like Brazil, Russia, India and China, also known as the

BRIC nations, are great examples, used to illustrate the potential and power some emerging markets

have. The BRIC countries are documented to have some of the fastest-growing economies in the

world, while also being home to around 3 billion people, almost half of the world’s population

(Economy Watch). A Goldman Sachs study believed that by 2041, but later altered to 2032, the

BRIC nations will continue growing to the point where not only will they become developed

economies, they will also overtake the current market leaders (Financial Times).

Frontier markets, on the other hand, are characterized as countries with poor liquidity, unstable

currencies, almost non-existent stock market, and inadequate regulations (Investopedia). Another

distinction of frontier countries is that their economies are not as dynamic as the developed and

emerging markets. Frontier markets are usually dependent on oil or other single commodities

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(Interactive Investor). Although the qualities of frontier markets may not seem as attractive as

developed and emerging markets, their constant growth along with their high potential may make

them attractive to passive investors. For example, countries such as Bangladesh and Nigeria have an

outstanding index growth by the second half of 2014 of around 34.2% and 32.5% respectively

(Interactive Investor). The high gains, accompanied by a relatively young population with the

ability and potential to grow, will cause some investors to see frontier markets as potentially

lucrative markets for investment.

So, with the constant development in our global markets, investors must understand the differences

between the three main economic markets (developed, emerging and frontier); they must also have

the ability to analyse the key aspects and differences of developed markets (such as Norway, USA

and Japan), emerging markets (such as China and Turkey), and frontier markets (such as Nigeria,

Saudi Arabia, and Croatia).

2. Emerging Markets

In general emerging markets are markets that are less mature than the developed markets. One

common characteristic of emerging markets is market freedom. Commonly, emerging markets have

high levels of government intervention and control along with low information transparency and

high insider trading. Developed markets on the other hand, are controlled by market forces, such as

supply and demand, enjoy high levels of transparency and flow of information and have strict laws

prohibiting insider trading. Emerging markets are classified based on some common characteristics

such as, lower than average per-capita income, rapid growth rates (since their economies are not

well established, sometimes minor implementations may be reflected in substantial growth), and

high sensitivity to volatile currency and commodity prices to name a few (About).

One thing to keep in mind is that not all emerging markets share the same characteristics and they

may also very in terms of global economic influence. For example, in 2002 a Chief Economist at

Goldman Sachs, named Jim O’Neill, picked the four top performing emerging countries, which

were Brazil, Russia, India and China, and named them the BRIC nations. These four countries were

chosen based on their high GDPs, rapid growth rates, global economic power and potential to

become developed markets in the upcoming years (FT). It is also worth noting that by the end of

2010 South Africa joined the top four nations and was later called BRICS.

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The rapid growth of emerging markets can be summarized in the chart below (Figure 1).

Figure 1

2.1 Why Emerging Markets are Appealing to Investors

The general concept of higher risk higher return is perfectly displayed when comparing developed

markets with emerging markets. The Cumulative Index performance graph of the gross returns of

the both the developed and emerging market indices below shows a perfect example of why

investors would prefer to invest in emerging markets. Emerging markets have been out performing

the developed markets since 2001. In 2015 market returns in emerging markets where 65.2% higher

than returns in the developed markets.

*Note: that the MSCI World index is composed of 23 developed countries/markets

Figure 2

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2.2 Risk in Emerging Market

2.2.1 Political and Sovereign Risk

Ranging from viruses to wars to revolutions, this issues that are closely related to emerging markets

make it difficult for investors to efficiently calculate and quantify political and sovereign risks. The

table on the right is a brief analysis done by Eurasia Group that illustrates how difficult it is to

quantify the political risk and forecast a country's returns.

*Note: The markets in the table are listed based on their projected political stability.

Figure 3

2.2.2 Volatility

A four year study of developed and emerging markets was conducted by an American financial

services holding company called State Street. The study shows that on average emerging markets

were around 3% more volatile than developed markets. This is demonstrated in the histograms

below (figure 4):

Figure 4

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2.2.3 Liquidity

As we now know, the emerging markets may seem appealing to passive investors, who do not mind

risk, due to their comparatively high returns, relative to developed markets. We also realized that

these high returns also come at a price of higher risk as the majority of emerging markets face

political risks and have a higher volatility rate. These risks are manageable if these markets were

liquid, investors may cut their losses and get out of that investment, but what if the market is illiquid?

Emerging markets are not as established as developed markets and sudden changes in interest rates

may cause severe liquidity problems. A recent IMF report suggested that if the Federal Reserve

Bank were to increase interest rates that would decrease lending and cash flow, which in return will

decrease the levels of demand and slow down financial activities within the economy (International

Business Times). Developed markets have established monetary policies and an efficient market to

deal with higher interest rates. The emerging markets on the other hand will suffer from the lack of

liquidity, and investors will not be able to cash out.

2.3 China

China’s economic policies have been undergoing reforms since 1978. These reforms have slowly

transferred some of the economic power from the hands of the government and into the hands of the

market which is the leading cause of China’s economic leap. The Chinese Economic Authority is

still in the process of amending their policies as new issues continue to arise. One of the main issues

that China is looking into is allowing the market to have the final say in allocating their resources

which would help improve economic output (Focuseconomics). These changes will give the market

the freedom of choice along with minimizing government intervention. To add to that, China’s

General Secretary Mr. Xi Jinping, has launched a campaign to crack down on any governmental

corruption that might hinder the free flow of the economy, having said that, this campaign was

aimed at the Communist Party’s senior officials (Focuseconomics).

Moving on to China’s Fiscal policy, during 1994 China was facing difficulties with their continuous

decline in tax-to-GDP ratio which was around 10.8% of GDP (focuseconomics). In order to tackle

this decline China has introduced a new taxation policy that saw a gradual incline in the tax-to-GDP

ratio to about 22.7% in 2013 (focuseconomics). This new tax scheme is part of China’s economic

reform which has decreased the ownership and power of the government in the economy. Also, the

tax-scheme has limited the government’s revenue which forced them to resort to land sale and

shadow banking (focuseconomics). This solution may seem like the government is talking on high

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levels of debt, but it is also worth noting that high majority of China’s debt is owned locally and in

local currency.

2.3.1 Business Culture and Issues

During the 1970s China was known for their closed economy that was centrally planned (CIA). No

imports and no exports, China considered itself to be self-sufficient and kept its doors closed to

external economies. The centrally planned economy was an economy that was fully controlled by

the government with high government interventions. In 1978, China opened its doors to the world

economies and started to implement market reforms in an attempt to switch from a closed market

economy to a more market based one (World Bank). In a market based economy, the market factors

are driven fully by forces of supply and demand. Having said that, China is not 100% a market

based economy as it is still considered a communist country, but the government has limited its

interventions to crucial moments that will help maintain a healthy economy. Now, after 2010, China

has become the world’s biggest and leading exporter with a population of around 1.3 billion and a

GDP of around $17.62 trillion (CIA). So, if China is the leading exporter and enjoys a strong

economy with a GDP that is higher than most developed markets, then why is it still considered an

emerging market?

China is still undergoing economic changes. Their economic reforms have not yet been complete as

they still face emerging market issues that developed markets do not face. For example, China has

the 2nd

largest population living under the poverty line (India has the largest). Another issue that is

facing China’s economy is their wealth to population ratio. Comparing China to neighboring

country Japan, a developed market, China has a GDP of $17.62 trillion which is around four times

as much as Japan’s GDP $4.75 trillion; but, when comparing their GDP Per Capita China falls short

(CIA). China’s GDP Per Capita is around $12,900 while Japan’s GDP Per Capita is around $37,400

(CIA).

Other emerging market issues that China is currently facing are the rapidly widening income

inequality and its high urbanization rates (World Bank). The shift in their economic procedures and

their quick adaptation to market reforms have bought huge inflows into the country and

significantly improved their exports, but a small percent benefited from that change. This left China

in the aphorism “the rich get richer while the poor get poorer.” With this in mind, China is a huge

country with the major inflow of the wealth is towards the urban cities and with a population of 1.3

billion, China is left with an urbanization problem.

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2.3.2 Market Sectors

China is the second largest economy in the world, and it is divided into three main sectors:

Agriculture which is around 9.2% of China’s total GDP, the industrial sector, with 42.6%, and the

service sector, with 48.2% (CIA).

With around two thirds of China’s population living and working in rural areas, the agriculture

sector is considered one of the biggest sectors in the world. China is the world leader in the

agriculture sector, where both production and farmer income have been increasing on an annual

basis. The grain production has increased over the year by around 4.5%, while other major

agricultural products such as cotton, sugar and fruits have all increased by 10.7%, 4.3% and 4%

respectively (Agri). With the continuous expansion in production came an increase in income. The

hard work that the farmers in the rural have put in to develop this sector did not go unrecognized, as

they have also witnessed their fair share of the prosperous economy. The farmer's annual income

has increased for the eighth consecutive year, with an 11.4% increase for the previous year (Agri).

This talk about the expansion of the agriculture industry and increase in farmer income is not as

rosy as it might sound. China is still struggling to produce enough agricultural products to meet it

growing demand. Some of the issues that the sector is currently facing is that most of the farming

equipment is outdated which is causing food and water pollution (Reuters). The government needs

to find extra funds to help farmers upgrade their equipment’s and improve with harvests. In an

attempt to aid the farmers China has asked to banks to increase and speed up their lending, and in

return the Central Bank of China will free-up some of the commercial bank’s reserves (Reuters).

2.3.3 Trade Balance

China’s total exports for 2014 is around $2.3 trillion (CIA), where its main exports are broadcasting

equipment, telephones and computers, office machine parts and integrated circuits to Germany,

United States, Japan and South East Asia (OEC). Its imports on the other hand reaches around

$1.96 trillion in 2014 (CIA), and it imports gold, petroleum, iron, cars and integrated circuits from

the United States, Australia, Japan and South East Asia (OEC). This shows China’s trade surplus

represented by a positive trade balance of around $340 billion respectively, which is illustrated in

the graph below:

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China’s Trade Balance

Source: http://atlas.media.mit.edu/en/profile/country/chn/#Trade_Balance

Figure 5

Figure 6

2.4 Turkey

Briefly, Turkey had a GDP of $1.5 trillion in 2014 (CIA), it is a member state of the World Bank

Group, and it ranks as 17th largest economy in the world (World Bank). In 2001 Turkey went

through a financial crisis where it sought aid from the International Monetary Fund (CIA). From

2002 to 2012 the Turkish economy picked up, where extreme poverty levels dropped from 13% to

4.5%, and access to basic quality education, health and municipal services improved drastically for

the average citizen (World Bank).

2.4.1 Business Culture

Turkey’s economy used to be one of the mid-average economies that witnessed many government

interventions. It was a country that was heavily dependent on two main sectors: Textiles and

clothing (CIA). Now, Turkey counts as one of the largest free market economies, with a booming

http://atlas.media.mit.edu/en/profile/country/chn/#Trade_Balance

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industrial and service sector. Furthermore, Its move toward privatization and a decrease in

government interventions have encouraged a new generation of middle-class entrepreneurs (CIA).


Turkey’s economy is mainly made up of three main sectors: Agriculture 8.2% which employs

around 25% of Turkey’s population, the industrial sector, with 26.9%, and the service sector, with

64.9%.

2.4.3 Trade Balance

Turkey’s total exports for 2014 is around $176.6 billion (CIA), when it mainly exported cars and

vehicle parts, refined petroleum, iron and delivery trucks to Europe and Iraq respectively (OEC). Its

imports on the other hand reaches around $240.4 billion (CIA), and it imports gold, refined

petroleum, iron, cars and gas from Europe, China and the United States (OEC). This leaves Turkey

with a negative trade balance of around $63.8 billion respectively, which is illustrated in the graph

below:

Turkey’s Trade Balance

Source: http://atlas.media.mit.edu/en/profile/country/tur/#Trade_Balance

Figure 7

Figure 8

http://atlas.media.mit.edu/en/profile/country/tur/#Trade_Balance

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3. Frontier Markets

“In essence, many frontier nations are the emerging markets of tomorrow.” A frontier market is, by

nature, less liquid than an emerging market and its market capitalisation is lower. Investors are

interested in frontier markets because they tend to grow very rapidly within the coming years,

offering high returns with low correlation to other markets. They are expected to become more

liquid and share more characteristics with emerging markets. Below are the 24 countries that

constitute the frontier market (Figure 9). In terms of the shares of the global equity market, frontier

markets only take up less than 1% of the whole equity market, contributing very little, according to

S&P, MSCI and FTSE (Figure 10).

Figure 9

Figure 10

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3.1 Why Frontier Markets Show Appeal

From figure 11 we see that the MSCI Frontier Markets Index had risen by 20% between the end of

2012 and March 31, 2015, whereas the MSCI Emerging Markets Index had seen an approximately

10% decline over the same period.

Figure 11

Figure 12 illustrates the price-earnings ratios over the four areas with only 7.23 units difference

between United States and

countries classified as

frontier markets. The small

difference is mainly due to

the price investors

collectively pay for earnings

growth and economic

expansion.

Figure 12

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3.2 Risk Analysis for Frontier Markets

3.2.1 Political and Sovereign Risks

“Frontier market stocks are often dominated by companies that are driven more by the local

economy than by global macro trends.” (Nathan J. Rowader, Senior Portfolio Manager, fwd

thinking viewpoint). For example, African frontier economies are prone to being driven by the oil,

agricultural, telecommunications and consumer goods sectors. Therefore, frontier countries that

experience drastic economic turbulence may not cause significant backlash to other countries, even

if they are geographically adjacent. We show this in more detail by using statistics. Between

January 1, 2009, and December 31, 2013, the average intercountry correlation among MSCI

Frontier Markets Index nations was 0.36, as compared with 0.63 for countries in the MSCI

Emerging Markets Index. Take Nigeria as an example, where people are constantly under threat of

terrorism. In the past three years, terrorist attacks in Nigeria have doubled. What makes Nigeria’s

economy worse is that elections and power struggles across the country can and will always plague

the domestic market, destabilising markets.

3.2.2 Volatility

Frontier markets are very volatile. Financial Times reported that, in 2014, the range of returns

within the asset classes was enormous, with Nigeria down 26 per cent in US dollar terms and

Bangladesh soaring over 50 per cent. Therefore, investors that require short-term reward would not

be willing to invest in such markets, because frontier markets are too risky to earn profits. However,

as a group, frontier markets are less volatile than the MSCI emerging market index, with frontier

markets averaging 63.9% volatility than emerging markets over the past twelve years. Figure 23

clearly verifies this statement. This is because economies of frontier countries are relatively

uncorrelated with each other. The strategy for investors is that they must seek chances to diversify

their portfolio as much as possible by investing in a number of different markets. Diversification is

the key to frontier investing, but can be a formidable task.

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Figure 13

3.2.3 Liquidity

Figure 14 looks at the percentage of market capitalisation traded relative to GDP. The more

financially free, the larger the percentage of market capitalisation traded relative to GDP. Indeed,

investors would only be interested in markets that have high degrees of market freedom, and would

only favour more financially advanced markets. The size of the economies of frontier markets only

comprises a minor percentage of the ones of developed countries, with of GDP-to-GDP ratio of less

than 5%. Figure 15 measures the turnover ratio for equities in various markets. In general, the

higher the ratio is the more liquid the market. The figure shows that the ratio has decreased

significantly from 2000 to 2010, and stood at all times lower than that of emerging markets, with

approximately half of the turnover of emerging markets. We can also see that developed markets

faced an all-time high turnover ratio. The pessimistic metric for frontier markets would drive

investors to shun them. Furthermore, fund managers find it hard to build a position in frontier

markets and hard to exit them, because both actions take lengthy amounts of time. This situation set

a big challenge for investors, since only stocks whose return potential exceeds the expected cost of

both the buy and the sell should be considered.

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Market cap traded as percentage of GDP

Figure 14

Turnover ratio for equities as percentage of average market cap

Figure 15

3.2.4 Corruption

Common is the news that frontier markets are corrupt. From the statistics offered by the Financial

Times, the average score on Transparency International’s corruption ranking for frontier markets is

4.2, versus 4.7 for emerging markets (and 7.6 for developed markets). This is not good news for

investors.

3.3 Nigeria

Nigeria’s Gross Domestic Product (GDP) was worth 568.51 billion US dollars in 2014, taking over

the number one place of South Africa, becoming the largest economy in Africa. It is reported that

Nigeria’s economy is growing at an average rate of 7% per year over the last decade (The

Economist, 2014). Nigeria has been experiencing rapid population growth, with 57 million more

people in 2008 than in 1990, a 60% growth rate. (IEA, 2008)

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About half of its population is 14 years old or younger. It is also the most populous country in

Africa (Radio Free Europe Radio Liberty, 2014). Nigeria’s agricultural sector has not kept pace

with the population growth; however, as once being a net exporter of food, it has now become a

new importer. Its main trading partners are (in order of trade volume): India, Spain, the Netherlands,

South Africa, and Brazil. (National Bureau of Statistics. 2015).

3.3.1 Market sector

Endowed with an abundance of natural resources, Nigeria’s economy can be classified into oil and

non-oil sectors, with the oil sector comprised 10.45% of total real GDP in 2015. The non-oil sector

grew by 5.59% in real terms in Q1 of 2015 (figure 16). Mining and Quarrying, and Agriculture are

also two large sectors that contribute much to Nigeria’s GDP. However, Nigeria’s economy is well-

diversified, in spite of the attention paid to its oil revenues in mainstream media.

Source: www.nigerianstat.gov.ng/pages/download/281

Figure 16

3.3.2 Business culture

Business culture in Nigeria is presented in a strictly hierarchical style. Managers tend to give orders

and make decisions. Most middle-ranking and senior managers in Nigeria are men and female

managers in Nigeria tend not to be treated respectfully even if the male employees are junior to

them. Therefore, female positions in business are still a problem in Nigeria. (World Business

Culture, n.d.)

3.3.3 Investment Characteristics

"Nigeria offers far too many opportunities to be ignored and despite all this noise, right now is the

time to invest", Anna Rosenberg, associate practice leader for Sub Saharan Africa at Frontier

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Strategy Group told CNBC. Due to political instability, potential threat of terrorist attacks,

especially by extremist groups such as Boko Haram, and crushing poverty, investors have a

negative view of Nigeria. “Despite the tough economic environment this year, medium- to long-

term economic prospects for the country remain positive”, a Frontier Strategy Group report

published in March said. Thanks to its large population, the consumer goods and service sectors,

especially banking, will seem profitable to potential investors. (Tidey, 2014)

Figure 17

3.4 Saudi Arabia

The Kingdom of Saudi Arabia, with Islam as its the principle religion, is located in southwest Asia

and bordered by Iraq, Qatar, and the Red Sea. The military expenditure is particularly noticeable in

that it takes up more than 10% of GDP, and stands as the fourth largest in the world. (SIPRI, 2014)

Backed by its oil reserves, Saudi Arabia enjoys a GDP growth rate of 2.7% in 2013 (Norway is

0.2%). It also has a high Human Development Index (HDI) and low unemployment rate of 5.7% in

2014. (Trading Economics, 2015).

Why is it still developing? There are a few reasons. Firstly, they have low standards of education. It

was reported that Saudi youth ‘generally lack the education and technical skills the private sector

needs,’ with the illiteracy rate standing at 13.7%, with only 85% of adults being literate.

Another issue, which is related to the one above, is youth unemployment, which stood at 12% in

2013. With almost half of its population under 25 years of age, this creates a problem regarding

increased social unrest.

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Saudi Arabia has an unsustainable health care model, with 76% of its caregivers and physicians

being expatriate workers. A related issue is the obesity epidemic currently running rampant in the

Gulf, with 35.2% of Saudis becoming obese. (Whitman, 2015)

Moreover, Saudi Arabia also has a lack of renewable water resources, and currently faces security

threats from multiple extremist groups both internally, and around the region. (Howells, n.d.)


Saudi Arabia is a country governed under absolute monarchy, and having Islam as its biggest

religion, with virtually all its citizens being adherents, it is essential to take social and business

culture into consideration, such as scheduled praying times and the discrimination towards females.

Additionally, Saudi Arabia ranked 12th in ‘Ease of Doing Business’ Index by the World Bank, and

it aims to build a more open and friendly business economy. Establishing trust and respect is

essential, but the concept of time is less precise or important. (Hierarchy Structure, n.d.)

3.4.2 Market Sector

Due to its unique geographical location, Saudi Arabia possesses rich natural resources. The

Kingdom is the largest oil producing and exporting country in the world, and the oil industry

accounts for 45% of GDP and two-thirds of government revenue. (Eia Beta, n.d.)

Saudi Arabia plays a leading role among the member of Organization of Petroleum Exporting

Countries(OPEC) to ensure the stability of the oil price.(Saudi Embassy, 2015) Apart from oil, the

government also pays attention to diversifying its economy, focusing on other sectors such as its

mineral industry, and agriculture. The government also encourages private businesses to create

more positions to deal with the problem of unemployment.


Saudi Arabia joined the World Trade Organisations in 2005 with aims of encouraging foreign

investment. Economic freedoms have increased by increasing the trade freedoms. However, labour

freedoms have decreased and some social problem is still present in the country. For example:

youth unemployment, competitive imbalance between nationals and foreign workers in private

sectors and discrimination to female participation in business. (Heritage, n.d.)

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Figure 18

The Capital Market Authority (CMA) announced that more open markets in Saudi Arabia will be

provided for qualified foreign investors who would like to invest in the Saudi stock market. (Ghias,

2015)

According to Foreign Direct Investment figures (Santander, 2015), Saudi Arabia enjoys plenty of

advantages in investment aspects, such as expanding its national infrastructure, increasing working

opportunities for younger generations, and a diversified economic environment, with growth in the

technological and banking sectors.

Saudi Arabia maintained a stable outlook of its credit rating in Moody’s estimation. This is due to

the government’s continuing financial strength in recent years. The level of government debt

showed only 1.6% of the GDP at the end of 2014, and the deficit is about 0.4% of GDP in the same

year. This led to a buffer zone, increasing room for domestic debt (Moody’s, 2015). However, if the

oil price remains low for longer periods, it will have negative impact on Saudi Arabia’s credit

profile.

The most recent news from Attwood (2015), shows that given its strong dependence on oil income,

Saudi Arabia’s fiscal position is weakened due to the declining oil prices, resulting in a budget

deficit in 2015 of up to 20% of Saudi Arabia’s GDP. The government plans to stop contracting new

projects and freezing appointments and promotions in the public sector, thus decreasing its

economic and fiscal strength, but increasing operational systemic risk.

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Figure 19

3.5 Croatia

The Republic of Croatia is categorized as a frontier market in the European area. Before the of 2008

global financial crisis, the GDP growth rate was 4-5% annually but now, after Croatia being under

recession for six years, its economic competitiveness has lagged behind peers in the EU. GDP today

was estimated by World Bank at $57.2 billion while the government national debt was around 59%

of GDP. However, Croatia is still identified as a high income country with high HDI and its GDP

per capita was estimated at 61% of the EU average in 2012 (The World Bank, 2015).


It is commonly believed that Croatia has a formal business culture, but in reality, its people are

receptive to other cultures. The country possesses a high literacy level and skilful workforce, with

more than 70% of Croatians using the internet. Concerning its work-life balance, business

participants express a strong family-consciousness (Passport to Trade, n.d).


The dominant economic factor is the service sector, with its tourism ranked 18th in the world and

comprising 20% of GDP. This is followed by the industrial sector with high revenue from textiles,

leather, food, drinks and tobacco. Oil production also comprises 11.8% of total export revenue (IMF,

2011). Most of the workforce is employed in the service sector, while 27.2% are employed in the

agricultural sector, which comprises 6% of its GDP, and is still a significant engine of

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growth. However, Croatia has not been doing very well with unemployment as the rate peaked at

22.4% at the beginning of 2014, although it currently stands at 15.9% as of August 2015.

Additionally, Croatia enjoys the exceptional advantage of being at the crossroad of the EU and

South East Europe. Transportation is becoming significantly a propulsive sector and the new

railway sector aims to increase the efficiency and competitiveness of the market. (Croatia.eu, n.d.)


Croatia is an ideal country to invest due to the wealth of advantages the country provides. It is

attractive in that there is a double taxation avoidance agreement with some countries and zero

customs within the EU. Additionally, Croatia possesses the strategic position due to its location in

the Europe (AIK-Invest, n.d). According to the Economic Complexity Index (ECI, n.d.), Croatia is

one of the largest exporting countries and it main trade partners are the rest of the countries in

Europe. Currently, most foreign direct investment in Croatia is in financial intermediation (31.4%),

manufacturing (18.0%), and trade (14.8%) while there are smaller percentages in the Hospitality

and R&D sectors.

In 2014, the United Nations Development Programme (UNDP, 2014) stated a creative project in

Croatia’s less developed countries, to use EU-funded projects in tourism as its employment and

growth engine.

Market liquidity is essential for market development. Some liquid stocks in Croatia such as INA,

Telecom, and Podravka have impacted on the market’s liquidity. During the financial crisis of

2007-08, Croatia’s turnover of liquid and illiquid stocks dropped by 31% and 68% respectively, but

they consequently increased in the post-crisis period. The presence of illiquidity represents the main

barrier to future stock market and foreign investment, owing to the low inflow of capital (Minovic,

n.d).

Croatia joined the EU in July 2013, and has since been very sensitive to any negative economic

developments within the Union. As it is still in recession, the timing may have been unwise,

although it would still pay dividends in the long run, as Croatia now has access to Europe’s free-

trade market.

Some other issues currently facing Croatia include a backlogged judicial system, inefficient

governance and public administration, and corruption. It is currently running a trade deficit of 49.3

billion Euros.

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Figure 20

3.6 Concluding Frontier Markets

Given the nature of frontier markets —— relatively illiquid in equity markets, and comprising only

a small percentage of global financial markets, risks can be substantial. However, we have plenty of

ways to mitigate these hurdles. Fund managers can always design a well-diversified portfolio that

spread out the risks, since frontier markets have low correlations between both emerging markets

and developed markets. By doing so, investors can actually enjoy lower overall risk if combined

efficiently. Moreover, globally, frontier markets form the fastest-growing economies. We would be

unwise to ignore their growth potential. A good example would be that both Qatar and the United

Arab Emirates had graduated from frontier market, to emerging market status in 2014. The others

are yet to prosper, but should not let us wait too long. Although the fledgling frontier markets seem

attractive at the stage, many investors seem prone to shun them, claiming the downsides outweigh

the upsides.

4. Developed Economies

4.1 Norway

Norwegians enjoy the highest standards of living the world, with this country consistently topping

the Human Development Index from 2006 to 2009, and then again from 2009 to 2014. This is the

primary reason why Norway was chosen to form part of our research. (U.N Development Report

2009, 2014)

In addition, Norway also boasts the second-highest GDP per-capita in Europe. Norway features a

very low unemployment rate of 4.3%. (Eurostat)

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In general, Norway is an egalitarian state, with little hierarchy in firms, empowered employees with

decision-making powers, brief and informal communication between colleagues and business

participants.. The people trust each other, there is good work-life balance, and high gender equality

at the workplace. This in part contributes to Norway’s low Gini coefficient, which measures income

inequality in the population. (Invinor, n.d.)

Norway has opted not to join the European Union, but instead participates in the EU’s single market,

together with Liechtenstein and Iceland, via the European Economic Area (EEA) agreement. Of

particular note is the fact that Norway uses the Kroner instead of the Euro. The Norwegian kroner

tend to fluctuate based on prevailing oil prices and interest rates.


Norway’s economy is reliant on natural resources to a significant extent. The government-

controlled petroleum sector accounts for more than 20% of its GDP, and represent almost 50% of

total exports. When oil prices dipped in mid-2014, Norway began to experience higher

unemployment, and this has led some critics to suggest that its economy is overly-reliant on

petroleum (Russia Today, 2015).

GDP growth in Norway reached an average of only 0.65% from 1978 to 2015 (Trading Economics,

2015), and is currently contracting, with -0.1% growth recorded on quarter in the three months to

June this year.


Norway is considered very welcoming towards foreign investment, with low barriers to entry for

overseas businesses, and ‘an investment regime that encourages international participation.’ It has

the world’s largest sovereign wealth fund, which complements its high taxes and government

spending. From figure 1, the 2015 Index of Economic Freedom considers Norway to possess the

world’s second best property rights regime. (Heritage.org, 2015)

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Figure 21

4.2 The United States of America

The United States of America is currently the world’s largest economy by both nominal and real

GDP estimations, accounting for 23% of world GDP (World Economic Outlook Database, 2015).

The U.S. experienced an average growth rate of 3.25% from 1947 to 2015, growing 3.9% on

quarter in the three months to June 2015 (Trading Economics, 2015). Real GDP growth was 3.3%

from 1983 to 2008, whereas the rest of the G& advanced economies only experienced a 2.3%

weighted average growth (Policy Review, 2012). It is the world’s largest importer, and second

largest exporter of goods (Census.gov, 2015).

The U.S. has a very diversified economy, with a GDP by industry breakdown as follows (figure 22):

Value Added by Industry as a Percentage of Gross Domestic Product

Bureau of Economic Analysis

Release Date: April 23, 2015

Line 2006 2007 2008 2009 2010 2011 2012 2013 2014

1 Gross domestic product 100 100 100 100 100 100 100 100 100

2 Private industries 86.9 86.8 86.4 85.7 85.7 86 86.4 86.8 87.1

3 Agriculture, fishing, and hunting 0.9 1 1 1 1.1 1.3 1.2 1.4 1.2

6 Mining 2 2.2 2.7 2 2.2 2.6 2.5 2.6 2.6

10 Utilities 1.7 1.6 1.6 1.7 1.8 1.8 1.6 1.6 1.7

11 Construction 5 4.9 4.4 4 3.6 3.5 3.6 3.7 3.7

12 Manufacturing 13 12.8 12.3 12 12.2 12.3 12.3 12.1 12

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13 Durable goods 7.3 7.1 6.8 6.1 6.4 6.5 6.5 6.5 6.5

25 Nondurable goods 5.8 5.7 5.6 5.9 5.8 5.8 5.8 5.6 5.5

34 Wholesale trade 5.9 5.9 6 5.7 5.8 5.8 6 6 6

35 Retail trade 6.3 6.1 5.8 5.8 5.8 5.7 5.8 5.8 5.8

40 Transportation and warehousing 2.9 2.8 2.9 2.8 2.8 2.9 2.9 2.9 2.9

49 Information 4.7 4.9 5 4.9 4.9 4.7 4.6 4.6 4.6

54 Finance, insurance, real estate, and leasing 20 19.9 19.1 19.9 19.7 19.7 19.9 20.2 20.2

55 Finance and insurance 7.6 7.2 6.2 6.7 6.7 6.7 7 7.2 7.2

60 Real estate and rental and leasing 12.4 12.7 12.9 13.2 13 13 12.9 13 13

65 Professional and business services 11.1 11.4 11.9 11.5 11.6 11.7 11.9 11.8 12

66 Professional, scientific, and technical services 6.5 6.7 7.2 6.9 6.8 6.9 7 6.9 7

70 Management of companies and enterprises 1.7 1.8 1.8 1.7 1.8 1.8 1.9 1.9 2

71 Administrative and waste management 2.9 3 3 2.9 2.9 2.9 3 3 3.1

74 Educational, health care, and social assistance 7.3 7.4 7.8 8.4 8.3 8.3 8.3 8.2 8.2

75 Educational services 0.9 1 1 1.1 1.1 1.1 1.1 1.1 1.1

76 Health care and social assistance 6.4 6.4 6.8 7.3 7.2 7.2 7.1 7.1 7.1

81 Arts, entertainment, accommodation 3.7 3.7 3.6 3.6 3.6 3.6 3.7 3.7 3.8

82 Arts, entertainment, and recreation 0.9 1 1 1 1 1 1 1 1

85 Accommodation and food services 2.7 2.7 2.7 2.7 2.6 2.7 2.7 2.7 2.8

88 Other services, except government 2.4 2.3 2.2 2.3 2.2 2.2 2.2 2.2 2.2

89 Government 13.1 13.2 13.6 14.3 14.3 14 13.6 13.2 12.9

90 Federal 4.2 4.2 4.3 4.6 4.7 4.6 4.4 4.2 4

95 State and local 8.9 9 9.3 9.7 9.6 9.4 9.1 9 8.8

99 Private goods-producing industries 21 20.9 20.5 18.9 19.1 19.7 19.7 19.8 19.6

100 Private services-producing industries 66 65.9 65.9 66.7 66.6 66.4 66.7 67 67.5

Source: http://www.bea.gov/industry/gdpbyind_data.htm

Figure 22

In 2012, employment by sector was split into 79.7% in the service sector, 19.2% in the

manufacturing sector and 1.1% in the agriculture sector (CIA World Factbook, 2013).


The business culture in the U.S. is characterised by the private sector’s domination of economic

decision making, which in turn is aided by loose regulation and government intervention (Forbes,

2006). This is in addition to courts which widely protects property rights and enforces contracts.

http://www.bea.gov/industry/gdpbyind_data.htm

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4.2.2 Growth Engines: Research, Development, and Entrepreneurship

Perhaps the defining aspect of the U.S.’s suzerainty relationship with the rest of the world for much

of the 20th century is based on the ability of its people to innovate, producing new research and

development which is then channelled into its business environment.

The entrepreneurial spirit is a key driver of much R&D. Research done by the Global

Entrepreneurship Monitor indicates that “half of all working men in the United States probably have

a period of self-employment of one or more years; one in four may have engaged in self-

employment for six or more years. Participating in a new business creation is a common activity

among U.S. workers over the course of their careers." (Springer, 2007)

Business creation has been increasingly noted by scholars to be a key growth driver in the United

States, as well as Western Europe.

Of salient interest may be the fact that citizens of the U.S. have been observed to be particularly

willing to try new products of all types, and to urge manufacturers to improve their current product

lines. (The Economist, 2009)

4.2.3 Components of the Economy

The U.S. remains the largest manufacturer in the world, with an output of US$2.4 trillion in 2013,

greater than Germany, India, France, and Brazil combined. (Thomasnet, 2013)

Its main industrial sectors are petroleum, steel, the auto industry, construction and agricultural

machinery, aerospace technologies, telecommunications, electronics, chemicals, processed foods,

consumer products, mining, and lumber.


Both Moody’s and Fitch designate the U.S. as having a AAA credit rating, the highest available.

However, Standard & Poor’s has assigned the U.S. with a AA+ domestic and foreign rating, the

second highest available.

Although Americans have the highest average household income among OECD nations (OECD,

2014), income inequality is becoming a growing problem, with the top 1% of earners accounting for

95% of all income gains, from 2008 to 2012. (Saez, Emmanuel, 2013)

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Some critics believe that this inequality presents a danger to democracy and social stability

(Krugman, 2011), or a sign of national decline (Packer, 2011), while others disagree, stating that

income inequality is in itself not harmful to the economy or to society, but merely serves as a

distraction from real problems, such as long-term unemployment, and slow growth. (Winship, 2013)

The U.S. Treasury has been obtaining negative interest rates on government debt since 2010.

(Federal Reserve, 2015)

This indicates that the market, together with institutional investors such as pension funds, insurance

companies, or mutual funds, believe that alternatives with sufficiently low risk to hedge their

positions against, do not exist (Reinhard and Sbrancia, 2011) (Wessel, 2012).

By one measure, which is the value of its listed companies’ securities, the New York Stock

Exchange (NYSE) is in excess of 300% of the size of any other stock exchange in the world (World

Federation of Exchanges, 2011).

NASDAQ, another U.S. stock exchange, is the world’s 3rd largest, after the NYSE and Japan’s

Tokyo Stock Exchange.

America’s finance industry composed 50% of non-frm business profits in 2010, with finance

industry income comprising 7.5% of GDP, as well as 20% of all corporate income.

According to research conducted by the International Monetary Fund, the Bank for International

Settlements, and economists from Harvard University and the University of Chicago, the U.S.

financial sector is so large that it impedes economic growth (Tankersley. 2014) .It was calculated

that in 2014 that while R&D workers add $5 to GDP for every dollar they earn, workers in the

finance industry cause GDP to contract by $0.60 for every dollar they are paid (Cecchetti and

Enisse, 2015).

The U.S. is the second largest trading nation in the world (Financial Times, 2014) . In addition,

around 60% of all funds used in international trading is U.S. dollars (Reuters, 2015). Its trade deficit

stood at $450.3 billion in 2013, while its deficit with China was $318 billion in 2013. (Palmer, 2012)

In addition, China’s foreign exchange reserves included $1.6 trillion of U.S. securities as of 2013

(Congressional Research Service, 2014), and it is one of America’s ten largest trading partners

(Census.gov. 2010).

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4.2.5 Capital Flows

Since late 2013, capital flows into emerging market have weakened, as growth across Asia slowed

due to weakening economies in that region (Bloomberg, 2013).

With the slowdown of China, unrest across Thailand following a recession, and Malaysia’s ringgit

weakening by 25% since the start of 2015, more money has started flowing back into advanced

economies. This is because they have started showing signs of recovery, and are generally viewed

as being more stable than emerging markets. (Trading Economics, 2015)

North American funds obtained the lion’s share of the $155.6 billion of investment into developed-

market equity exchange traded derivatives, from January to July 2013, receiving $102.4 billion

(65.8%). Japan managed to attract $28 billion, a record breaking amount, and Europe-centric funds

received$4.3 billion. On the other hand, out of emerging market funds came $7.6 billion. (Rowley,

2015)

Figure 23

4.3 Japan

Japan has the world’s third largest economy by nominal GDP (World Bank, 2013). It is also the

second largest developed economy in the world (OECD, 2013). Additionally, Japan has the world’s

largest electronics goods industry (OICA, 2013), and is the third largest manufacturer of

automobiles in the world (World Intellectual Property Organization, 2013). It is frequently

considered to be one of the world’s most innovative countries, topping several measurements of

global patent filing figures.

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Perhaps of interest to investors is the fact that while Japan has the second highest life expectancy of

any country (WHO, 2009), its population is rapidly ageing, with 24.1% of the population being over

65 years of age in 2012 (Japan Statistics Bureau, 2013). This number is projected to jump to almost

40% of the population by 2050.

This demographic issue is expected to have a major impact on the Japanese economy, with

workforce population potentially dropping heavily, and also add burdens, such as increases in the

costs of social security benefits; for example, the public pension plan (Gonzalo Garland, 1995).

The Japanese economy used to grow at a remarkable pace: It grew on average 10% in the 1960s, 5%

in the 1970s, and 4% in the 1980s, becoming the second largest economy in the world by

1978(Marshall Cavendish, 2013). It spent almost nothing on defence, allowing it to grow at such a

rapid pace (JEI, 2015).

Rapidly rising asset and real estate prices caused the Japanese economic bubble in the mid-1980s,

which imploded dramatically when the Tokyo Stock Exchange crashed in 1990-1992, and growth in

the 1990s hovered at about 1.5%, much lower than other developed countries. This was how the

term, Japan’s ‘Lost Decade’, came about.

Japan’s GDP showed an average growth of 2.08% from 1980 to 2015. In the second quarter of 2015,

its economy contracted, shrinking by -1.2%, in contrast to the 4.5% growth it experienced in the

first quarter of 2015 (Trading Economics, 2015).

Its growth in the last quarter of 2014 was initially estimated at 2.2%, bouncing back from recession

in the previous quarter (Wall Street Journal, 2015). However, this was revised down to 1.5%, due to

lower estimate for capital investment and inventories (Financial Times, 2015).


In 2012, the service industry contributed to the bulk of Japan’s GDP, making up 73.18%. Industry

came second, contributing 25.6%, while the remaining 1.22% of Japan’s GDP was attributed to

agriculture.

Japan possesses inadequate natural resources to support its own economy or population, and its one

of the top three importers of agricultural products in the world. It maintains its market position by

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exporting products in which it holds a competitive advantage; for example, engineering-oriented,

and R&D led products. It does so in exchange for petroleum and raw materials (OECD, 2007).


Part of the reason why Japan’s GDP growth figures for the fourth quarter of 2014 were revised

downwards, was due to shrinking inventory growth. However, this was offset by an increase in

household consumption, which went up by an annualised rate of 2%, in contrast to the previously

reported figure of 1.1%.

Additionally, Abenomics do not seem to working, as businesses remain hesitant to increase

investment, in spite of record low interest rates, and strengthening stock prices. Growth remains

unsteady (Wall Street Journal, 2015).

On the other hand, Japan reported a rise in their current account surplus, from 853 billion Yen in

December, to 1,058 billion Yen in January. This is mainly attributed to falling oil prices and is

welcome news, coming after its current account dropped into a deficit, which was caused by the

Fukushima disaster and the subsequent increase in oil imports.

Japan’s credit rating was recently cut from AA- to A+, by Standard & Poor’s on the 16th of

September 2015. The reason given was that the S&P analysts do not feel that the policies of Shinzo

Abe’s (Japan’s current Prime Minister) administration, would not be able to reverse Japan’s

lacklustre growth and continued problems with deflation, anytime soon (Bloomberg, 2015).

Japan is currently rated A1 by Moody’s, with a positive outlook, and A by Fitch, also with a

positive outlook (Trading Economics, 2015).

Linked to Japan’s low growth rate is its endemic, decades-long problem with deflation (MIT, 1999).

The Bank of Japan began using a policy of zero interest rates in 1998 by instituting quantitative

easing, as suggested by Nobel Prize winner Paul Krugman. Although the economy showed some

signs of recovery in 2005, with GDP growth of 2.8% (Hisane, 2006), in 2008 it was concluded that

the quantitative easing strategy had failed (Spiegal, 2006); Japan by then had the world’s lowest

interest rates, but deflation still existed (OECD, 2008).

Recently, however, the Bank of Japan had announced that in an attempt to halt deflation, it would

be purchasing between 60-70 trillion Yen in bonds and securities, effectively doubling Japan’s

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money supply within two years. Financial markets reacted bullishly to this news; the Nikkei 225

gained in excess of 42% in value since November 2012 (Riley, 2013). As a side note, because of

deflation pushing down the value of the Yen relative to other countries, Japan has become the

biggest export market for 15 trading nations worldwide.

It is currently the world’s largest creditor nation, holding its position as a net international

investment surplus country. From 2010 to 2014 it has held its position as the world’s second largest

holder of private financial assets, holding 11.716 trillion Euros worth in 2014. As of 2013, Japan

was home to 62 companies from the Fortune Global 500, a ranking of top 500 corporations in the

world, in terms of revenue (Chandler, 2011) (Allianz Global Wealth Report 2014).

Source: http://www.tradingeconomics.com/japan/gdp-growth-annualized

Figure 24

http://www.tradingeconomics.com/japan/gdp-growth-annualized

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Figure 25

Source: https://rwer.wordpress.com/2011/03/24/emerging-vs-developed-countries-gdp-growth-

rates-1986-to-2015/

Figure 26

5. Compare and Contrast

In this essay, we have looked at the characteristics of different developed economies, in particular

whether they are ripe for investing or not. Having done this, we can now compare between

developed and developing economies, and examine why people would rather invest in emerging

markets,

First of all, let us look at Saudi Arabia, which is similar in some respects to Norway. They are both

overly reliant on natural resources. If Saudi Arabia wishes to attain the status of a developed

country, it should follow the Scandinavian model, and improve its standards of living, by improving

https://rwer.wordpress.com/2011/03/24/emerging-vs-developed-countries-gdp-growth-rates-1986-to-2015/

https://rwer.wordpress.com/2011/03/24/emerging-vs-developed-countries-gdp-growth-rates-1986-to-2015/

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its education and health care systems, emancipate women, and allow for more liberal values. Also,

it could do with detaching itself from its neighbouring countries, so that its economy is not affected

by movements in the region, following Norway’s example of staying out of the EU.

The jewel in the crown of emerging markets: China, the only BRIC nation which held true to its

promise, and is still showing healthy growth. It runs parallels with both the U.S. and Japan. Along

with the U.S., China is a net exporter to the rest of the world, and is very thirsty for natural

resources. These two countries top the list of countries with the highest oil consumptions in the

world, with the U.S. consuming around 19 million barrels per day in 2011, with China consuming

about 10 million barrels per day in the same year. Japan comes third, consuming 4.5 million barrels

per day (CIA World Factbook, 2011).

Also, both China and the U.S. face the problem of a widening income gap. Reforms have brought

huge capital inflows to China, but only a small percent benefit from this change. In the U.S. 95% of

income growth from 2009-12 was captured be the top 1% of income earners.

However, there are several major differences between the U.S. and China. To begin with, the U.S.

runs on what is effectively a two-party system, which can lead to inefficient bureaucracy, and even

government shutdowns. China, on the other hand, exists under a single-party system, which has

been credited with helping to stabilise the country. Next, the private sector of the U.S. dominates

economic decision making, and it boasts loose regulation and lack of government intervention.

While this has led to breath-taking profits being generated by the service sector, it has also been

pointed out that the laxness of the rules governing the financial industry has led to the most

cataclysmic market crashes of the 21st century, nearly causing global economic meltdowns, with

the effects still reverberating today. China’s government is still firmly in control of its markets, with

recent interventions preventing the Renminbi from appreciating beyond certain levels. However,

economic power is being slowly transferred from the government to the market. One example is the

introduction of a new taxation policy to increase their tax-to-GDP ratio.

Another significant difference between the two giants are their growth engines. While the U.S.

relies on technological innovation and entrepreneurship to maintain its hegemony over the world

economy, and has a hugely diversified economy, China is still relatively reliant on agriculture and

manufacturing, with the agricultural industry forming 9.2% of China’s GDP, compared to 1.22%

for Japan, and 1.1% in the U.S. China is a world leader in the agriculture sector, which continues to

expand.

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Finally, the biggest difference between China and the U.S. is in their debt composition. The

majority of Chinese debt is owned locally and in local currency, due to the high savings rate of its

citizens. However, China holds the vast majority of U.S. debt; this situation was exacerbated during

the 2007-08 global recession, when many large U.S. banks and financial institutions were on the

brink of bankruptcy, and needed large sums of equity to keep them afloat. China holds $318 billion

of the U.S. $450.3 billion trade deficit in 2013, while it is one of America’s 10 largest trading

partners. On the other hand, China had a positive trade surplus of about US$340 billion in 2014.

The major difference between developed and developing countries seems to lie in their standards of

living. Countries like Norway and Japan are noted for their egalitarian societies, with minor income

inequalities, although male patriarchy and gender inequality remain problems in Japan. China,

Turkey, and Nigeria, on the other hand, have significant issues with poverty. According to the Wall

Street Journal, China has a poverty rate of 15%, or about 200 million people. Turkey is a similar

example with 16% of its population living below the poverty line. In Nigeria, a staggering 33.1% of

the population live below the poverty line (World Bank, 2014). In Saudi Arabia, social problems are

omnipresent. It faces high youth unemployment, competitive imbalance between nations and

foreign workers, and gender inequality in the workplace, all of which could be potential sources of

unrest.

Let us now shift our focus to examine the similarities and differences between emerging markets

themselves. The most noticeable difference can be seen in population sizes. China has the world’s

largest population, while one in four Africans is a Nigerian, with a population of 182.2 million. In

the meantime, Saudi Arabia has a population of about 29 million, while Croatia has a population of

just 4.2 million. With large populations come large markets, high savings rates and a large labour

force, and these combine to drive the growth rates of the large developing countries. However,

while Saudi Arabia and Nigeria both have high population growth rates, Croatia and China are

facing population declines, with Croatia in particular continuously experiencing negative growth

rates.

A similarity that is distinct among developing countries is their reliance on natural resources. All of

the emerging and frontier markets described in this essay, with the notable exception of Croatia, are

heavy consumers of natural resources. China is a net importer of are gold, petroleum, iron, cars, and

integrated circuits from the U.S., Australia, Japan, and South-east Asia. Turkey has a remarkably

similar structure, importing gold, refined petroleum, iron, cars, and gas from Europe, China, and the

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U.S. Nigeria, once a net exporter of food, is now a net importer, in order to feed its growing

population. Saudi Arabia has a dearth of renewable water resources, with 40% of its water coming

from non-renewable sources, and 50% coming from desalination, which is piped from the Persian

Gulf from a distance of over 460 kilometres.

Lastly, political instability remains a problem for some emerging markets. China faces unrest in

Tibet and its western region of Xinjiang, with disgruntled ethnic minorities who fear being

assimilated by the dominant Han Chinese ethnic group, leading various separatist movements in

recent years. In Nigeria, political instability, potential threat of terrorist attacks, and crushing

poverty all contribute to investors’ negative view of Nigeria. Saudi Arabia is located in a region that

is rocked by civil wars, mass migration of refugees, and interventions by the U.S., Russia, and other

Arab countries, most notably Iran. If these countries can overcome these internal and external

problems and stabilise their political situations, their growth potential could truly reach unrivalled

heights.

6. Conclusion

In general, emerging and frontier markets are showing healthy growth rates and robust economies,

with an average growth of about 6.5% per annum. This is the biggest reason why people prefer to

invest in these markets, as opposed to developed countries. However, many of them still have

significant issues to overcome before they can be considered developed countries; with high returns,

come high risks. China, Saudi Arabia, and Turkey face significant accusations of human rights

abuses, with China’s clampdown on political dissidents, lack of press freedoms, and draconian

censorship laws; Saudi Arabia’s treatment of women and its Shia minorities; and Turkey’s

treatment of its Kurdish minorities.

While China and Nigeria both have large economies, being the world’s 2nd and 21st largest

economies respectively, they have very low per-capita GDPs, being placed 81st and 123rd,

respectively. By contrast, Norway, the U.S., and Japan, were ranked 6th, 9th, and 26th, respectively

in terms of per-capita GDP. To truly overtake the current developed economies, the developing

countries must raise their standards of living significantly across the board, not just for the top few

percentiles of its people. Judging by the size of their populations, this could prove to be a daunting

task.

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To sum up, as the U.S. prepares to raise interest rates, we are seeing increased occurrences of

accelerating capital outflow from emerging markets, in addition to decreased foreign investor flows

to these same markets. This is also partly due to the increasing risk aversion behaviour of investors,

due to the perceived instability of the BRICs: In particular, caused by Brazil’s present currency

crisis as investors rush to minimise losses caused by exchange rate disparities, and the sanctions

imposed on Russia, which have been crippling its economy. In China, however, the major cause of

capital outflows was due to repayment of foreign currency loans by emerging market firms,

preserving its perceived stability for now (Financial Times, 2015). There are also fears that the

growth of emerging markets have led to the development of a bubble, which is about to be popped,

led by the trigger of the U.S. Federal Reserve’s tapering of quantitative easing policies (Colombo,

for Forbes, 2014). There are also reports postulating that the entire South-east Asian region is

caught up in a huge bubble, and that the credit-and-debt-fuelled bubble of Singapore, the world’s

4th largest financial centre, is about to burst, led by a plummeting Malaysian ringgit, and capital

flight from the region (Colombo, for Forbes, 2014). If this happens, the Asian Economic Crisis of

1997 could repeat itself, hitting markets globally, and severely hinder the nascent recovery of

Europe, and other developed regions.

Word Count:

9,810

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