The Hindu Business Line : Will `emerging' economies ever emerge?

The term `less developed countries' was replaced by `emerging economies' to allow for the possibility that some day, some how, these countries would achieve per-capita income levels above $10,000.

But apart from South Korea, most of the others remain firmly in this category.

However, a radical change will come about over the next 10 years, if India and China (which account for perhaps two-thirds of the population of the emerging economies as a group) continue to race forward.

According to figures put together by the International Finance Corporation, the GDP of emerging market countries as a group has been growing at double the rate of advanced economies.

Their combined GDP grew at 6.6 per cent in 2004, while high income nations grew at 3.1 per cent. Judging from the fact that the $300 billion cross border private investment in terms of debt and equity is larger than aid flows to emerging economies by a ratio of 4 to 1, it would seem that this pace of growth is widely expected to continue.

FII inflows

Interestingly in stark contrast to the picture one gets on the basis of net FII inflows/outflows, the September 2005 Global Financial Report of the IMF the volume of trade in secondary markets for local currency bonds, as a percentage of total trade volume, has risen from 25 per cent in 1997 to 45 per cent in 2004.

Unfortunately corresponding figures for secondary trade in shares are not available.

Issue of international securities by official and non-official entities in emerging economies has increased from $325 million in 1995 to roughly $700 million in 2003; domestic bond issuance increased from $1 trillion to $2.4 trillion.

Due to rising liquidity, low inflation, and increases in saving rates, spreads on emerging market bonds have dropped to 400 basis points from more than 800 basis points in 2003.

Inflows of foreign direct investment into emerging markets grew at 23 per cent a year during 1990-2000.

After falling to a seven-year low of $96 billion in 2003, this index of expectations was projected to post its second strong consecutive year of growth, reaching $149 billion by end 2005.

Meanwhile, FDI outflows from developing countries in 2004 are estimated to have surged $40 billion in 2004, from $3 billion in 1991.

In a recent AT Kearney survey of global executives regarding China and India ranked higher than the US as the most-preferred destinations for foreign direct investment.

According to an IMF publication titled `Southern Multinationals', `south-south' FDI from a company in one emerging economy to a company in another has been growing five times faster than `north-south' investment, from $15 billion in 1995 to $46 billion in 2003. Figures for `south-north' investment are not available.

According to Standard & Poor' Global Stock Markets Factbook, 2005, market capitalisation in emerging economies has more than doubled over the past decade, from less than $2 trillion in 1995 to an expected $5 trillion in 2006.

Emerging economies now account for more than 12 per cent of world market capitalisation.

Emerging market equity funds absorbed $20.3 billion of net inflows in 2005, beating the previous record of $14.4 billion of inflows from 2003.

Of the 26 markets in the MSCI Emerging Markets Index, at least 10 climbed to record levels during 2005.

There is, however, a flip side to this particular parameter: FII flows accounted for 80 per cent of total FDI/FII inflows during 1999-2003, compared with 60 per cent during 1993-1998.

On the other hand, over the past decade, institutional investors (pension funds, foundations, and endowments) rather than speculators have increased their emerging market allocations from 9.67 per cent of total assets under their management to $1 trillion, i.e., more than 16 per cent of total assets.