The phrase ‘emerging markets’ is so ubiquitous that it can be easy to lose track of its meaning. But it’s important to remember that we refer to markets as ‘emerging’ for a reason – because they are, supposedly, in the process of becoming developed, modern, fully industrialized economies. But at what point has an emerging market emerged?
While there is no clearly established framework for designating a country as “developed” or “developing,” the primary factor used for these designations is GDP per capita. The World Bank defines a developed nation as one that maintains a GDP per capita figure of above $12,376.
Hitting this target is a long and complex process that requires delicate planning and cooperation on the part of governments, industry, and citizens. If not properly implemented, economic policy could lead a country into what is known as the Middle Income Trap, a phenomenon in which countries almost or barely achieve developed status only to slip back into the middle-income category. This is a perennial challenge for many countries – out of 101 middle-income economies in 1960, only 13 reached high-income status by 2008
Brazil, for example, has struggled with the Middle Income Trap for many years. After decades of economic progress, Brazil was on the fast track to becoming a developed economy. But in the 1980’s, a credit crisis rocked the country, and GDP per capita never recovered.
However, the good news is that Brazil’s economic framework has improved markedly in recent decades, showing that the Middle Income Trap isn’t a death-blow to a nation’s chances of achieving developed status.
There are a few key factors to avoid this economic malaise. Perhaps the most important is the development of domestic value-added production. Too often, emerging economies send their primary goods abroad to be transformed or processed, and lose out on the value of this crucial phase of the supply chain. These nations can end up relying too heavily on their natural resources, never establishing the domestic industry needed to fully prosper from their goods.
With solutions for domestic value-added production, more of the total supply chain remains at home. This can allow for the development of another crucial component of a developed economy – strong domestic demand. As income per capita rises, so too does purchasing power, leading to a more robust domestic market for finished goods.
Take the timber industry for example. In many emerging markets, timber exports primarily come in the form of raw logs. Shipping raw logs, obviously, comes with much higher logistical costs, and can reduce efficiency by over 15%. Shipping processed timber is much more efficient.
But that can’t be done without in-country solutions for value-added processing. In many emerging markets, these opportunities don’t exist – yet. That’s where investors come in.
When investors think of emerging markets, the first thing that comes to mind is usually the primary sector. And while many attractive opportunities exist at this stage, the primary sector is only the beginning of emerging markets’ potential. Equally important is the opportunity to participate in the development of entirely new supply chains.
The primary-sector focused economies of many Latin American nations present a strong case for this type of targeted, supply-chain integration investment. For example, manufacturing makes up only 12% of Colombia’s exports, dwarfed by raw materials like crude petroleum. Even in the agricultural sector, processing often takes place in the destination country.
Colombia’s foreign relations company, ProColombia, makes an effort to court FDI into this type of value-added manufacturing. While much of the foreign investment that comes into Colombia is focused on the extraction industries, there is clearly an opportunity to participate in the integration of agricultural supply chains, which remain considerably undeveloped.
Sectors of the Colombian Economy
Another good example is Panama. In terms of GDP per capita, Panama ranks highest in its neighborhood at $15,000. While this would suggest that Panama ranks squarely in the developed world, its heavy reliance on foreign capital and shipping leaves it vulnerable to sudden economic shifts. While true for all nations, Panama’s role as the intersection between the Atlantic and Pacific oceans highlights this vulnerability.
FDI Into Panama
Panamanian demography is excellent for an upper-middle-income country seeking to invest in sustainable value-added manufacturing. Their abundance of young, increasingly educated workers, coupled with a healthy GDP per capita, makes Panama a prime candidate for becoming a developed nation with a diverse domestic economy at some point in the not-so-distant future.
This type of investment can often mean the difference between an economy that emerges and one that doesn’t. After all, the tertiary sector can only grow on the foundation of a solid secondary sector, and that means keeping more of the value chain in-country through domestic processing and value-add solutions.
With a vibrant demography, abundant natural resources, and rising GDP per capita, Latin America is quickly shedding its undeserved reputation as an often overlooked segment of the world economy. A plethora of opportunities exist for foreign investors who wish to position themselves at the forefront of the development of these emerging economies.