Emerging markets, since they have come in vogue in the late 1980s, have been the places of the new and the developing and the learning. In other words, compared to the more advanced, industrial nations of western Europe, Japan, Australia, New Zealand and North America, they have been regarded as more backward and thus riskier, albeit trying hard to improve their economies. Yet in many ways, the emerging market countries are more sophisticated than the developed market nations of the West.
From economic to fiscal policies, the emerging countries have a lot to teach the West. The question is, will the West learn from the ideas of these emerging market countries?
After the Mexican peso crisis of almost a year ago, many investors, even some of those once buoyant about the new frontiers, began to doubt the enduring soundness of these countries and the wisdom of investing in these markets. But like most stereotypes, these impressions don't fit reality.
Among the lessons these nations can teach the West are the importance of openness to foreign portfolio investment, privatizing to make products and services more competitive and to reduce government fiscal deficits and corruption, policies to lower taxes, and better financed pensions, specifically terribly underfunded social security systems.
Another issue is the growing stock-market capitalization of the emerging nations, many of which are bigger than those of many developed nations, and because of their growing populations offer better potentially long-term growth prospects.
As part of their programs to revive their poorly performing economies beginning in the 1980s, many of these emerging nations opened their stock markets to foreign portfolio investors, eliminating many restrictions on stock ownership and trading. One notable exception is Chile. A leader among these nations in free-market policies, it still has some restrictions on short-term trading by foreigners.
Likewise, many of these nations have opened up their corporate governance process. The same cannot be said in these areas for such Western countries as Germany or Switzerland or France or Japan. These nations in various ways restrict trading or corporate governance; these nations restrict foreign portfolio trading or, through sizable holdings by banking institutions or crossholdings of other industrial corporations, give investors little voice in proxy issues.
The developed nations have been for the most part slower to embrace privatization than many of the emerging nations. In turn, many countries in Western Europe as well as Canada, among other industrial nations, continue to see burgeoning fiscal deficits. Even the United States faces a government shutdown on the principle of whether the deficit should be eliminated. Many of these developed countries still prefer high taxes as a way to finance these deficits, refusing to recognize the drain on their economies. Some German companies are shifting business overseas to avoid the stifling taxes and regulations.
Investors have understood the lingering troubles in the developed countries. As Ullrich S. Moser, president of Moser Advisors Inc., Stamford, Conn., pointed out in his Nov. 13 commentary, the MSCI EAFE index underperformed the Standard & Poor's 500 Stock Index during the past 10 years. Worse, many of these countries show little sign of getting a grip on their problems.