First there was BRICs. Then came CIVETS. Then we were presented with BASIC, CRIM, BRICK, CEMENT, BEM, N11 and the 7% Club. Now barely a week goes by before someone tries to float another ‘useful’ investment acronym.
Behind the dense forest of exotic acronyms is a simple fact: the catch-all classification ‘emerging markets’ has lost much of its usefulness. It was invented in the 1980s, by World Bank economist Antoine van Agtmael, to replace the now-defunct acronym LEDCs (or ‘less economically developed countries’) by which the West had until then blithely referred to the rest of the world. The term ‘emerging markets’ served as a useful way to refer to fast-growing although crisis-prone markets like Russia, China and Mexico.
Within the term ‘emerging markets’ was quite a 1980s-assumption: these markets would follow the development route laid down by ‘developed’ economies, until they arrived in the neo-liberal end point reached by the US, the UK and other western countries. And the phrase also came to have strong associations with the currency and debt crises of the 1980s and 1990s.
But things have changed. The bigger emerging market countries have now overtaken the weaker developed markets, not just in total GDP, but also in the pricing they pay on their sovereign debt. Emerging market countries like China and Russia have accumulated trillions of dollars in foreign exchange reserves, and are now the main creditors of western sovereigns. In the 1980s, emerging markets depended on the west for capital inflows. Now the situation is reversed, and the US and EU depend on China to buy their sovereign debt.
It was partly to recognize this shift in economic power to emerging markets that Goldman Sachs economist Jim O’Neill introduced the now-famous acronym BRICs (Brazil, Russia, India and China) in 2001. It was a runaway success. A decade on, and MSCI has launched a BRIC index, there are several BRIC-focused funds, BRIC-focused blogs, BRIC conferences, and the leaders of the BRIC countries even held their own BRIC summit in 2009.
However, the success of the acronym, and the increase in capital flows to BRIC markets that followed, quickly led to questions and criticisms of the BRIC tag. In 2008, for example, when Russia’s economy slid into recession following the war with Georgia and the Credit Crunch, some analysts suggested Russia should be dropped from the grouping. This suggestion was sufficiently alarming to Russia that it organized not one but two BRIC summits in Russia in 2009. . (more…)