The emerging markets appear to be recovering from the financial crises of the past two years faster than anyone expected, and money managers have been tiptoeing back into those markets.
Pension funds are showing renewed interest in such markets, but they are moving with caution. And so they should.
Pension executives should wait until it is clear that both the emerging nations and international money managers have learned the key lessons from the crises.
For emerging nations, the lessons include the necessity of adopting the rules of real capitalism if they expect the benefits of the capitalist system and foreign investment. They cannot expect those benefits long term if they insist on simply painting a free-market front on a "crony" (read that "phony'") capitalist structure.
Free-market capitalist systems demand rock-solid contract, securities and bankruptcy laws backed by an unbiased legal system and a fair and independent judiciary. They demand clean and open accounting systems. They demand far more financial and legal disclosure than many countries and companies are comfortable with. They demand arm's-length economically justifiable transactions and an end to corruption.
For investors the lessons are that analysts and portfolio managers must look far behind the facade that countries often present to see if a real free-market capitalist system and its infrastructure are being developed.
They must pay attention to subtle hints and clues that what look like changes for the better are only skin deep. They must not allow themselves to be persuaded to accept variances from a true market-based system that are justified because of "cultural differences." After the Asian crisis broke, many analysts realized the warning signs had been there for some time.
Institutional investors have used their considerable economic clout to demand changes in this country -- witness the corporate governance movement's successes. They can use the same economic clout to demand real changes in business practices in emerging market countries -- for example, better and more open accounting.
Unless significant changes are made in these emerging markets, U.S. pension funds and their managers should withhold their investments.
Unless significant changes are made, the Asian market crisis will simply occur again a few years down the road, wiping out most, if not all, of the gains made in the meantime.