By Dr Sina Odugbemi
So-called ‘emerging markets’ might as well be styles of frocks and blouses in the world of haute couture; they are in and out of fashion with similar unpredictability. One moment a market is all the rage; the next moment it is in the pits of despond. It is an all too familiar if sorry tale. You know that an emerging market is in fashion via the global business press, especially when reporters, pundits, analysts as well as paid boosters and carnival barkers, all produce pieces on the market displaying breathless admiration: What a wonderful place to be this is! What astonishing prospects!
If the emerging market is particularly blessed it will feature in one of the fancy acronyms of the day: BRICS, MINTS, the Breakout Nations, etc. Investment bankers are proving fecund when it comes to dreaming up these meaningless acronyms (if they did not have such real-world consequences!). For once an emerging market is deemed ‘hot’, money flows into it. Investors and hustlers pile in. People who express doubt, urge caution or circumspection are drowned out by the frenzy of adoration and boosterism.
Eventually, inconvenient facts that are too significant to ignore begin to emerge regarding the much-fancied emerging market.
Here is a partial list of some of the things that begin to be noticed in these places:
- Governance reforms that were promised by the leaders of these countries often do not happen; or laws are passed that are not implemented. Blocking coalitions prove too strong and durable.
- Corruption persists, often on a massive scale.
- The regulation of businesses and markets exhibits no logic or coherence, and rules come and go unpredictably.
- As for corporate governance and accountability, forget it.
- There is no sanctity of contract often because the rule of law is weak.
As some point, players in the global financial system start displaying perturbation about the hitherto fashionable emerging market. Have you seen those documentaries about wildebeest crossing the Grumeti or Mara Rivers in the Serengeti in Africa? That spectacle is mild compared to what happens next: it is the stampede of the bulls. Money rushes out of the country. Capital flight intensifies. Above all, the tenor of the commentary and the coverage of the emerging market changes utterly. The ever so fickle fans of the country switch to the other extreme. As once they overpraised it, now they over condemn it. A judicious balance is, it would seem, for wimps.
Here is the key point: in the passage from fashionable or hot to passé, your typical emerging market remains essentially the same in terms of its fundamental characteristics…that is, if you are really paying attention. On the level of the individual, this is one of the profound lessons that Adam Smith teaches in his classic work: The Theory of Moral Sentiments (1759). He asks: whose opinion about yourself should you take seriously? Here is his answer:
The man who neither ascribes to himself, nor wishes that other people should ascribe to him, any other merit besides that which really belongs to him, fears no humiliation, dreads no detection; but rests contented and secure upon the genuine truth and solidity of his own character. His admirers may neither be very numerous nor very loud in their applauses; but the wisest man who sees him the nearest and who knows him the best, admires him the most.
Smith’s is a tough standard, but it is deeply wise. And what he is saying applies to these so-called emerging markets. They really need to focus on fixing their fundamentals not on being fashionable, let alone hot. They need to be improving governance systems, the rule of law, and the judicious management of markets and so on, so that when sober players, the kinds of companies that commission political risk analysis before they enter a market, take a look at the country they see the trajectory of the fundamentals and they are encouraged to come in. When that happens, those players are not likely to be fickle friends. Trouble is: it takes real effort at reform to impress them.
But if real effort at reform is not what matters, what does?
This post was originally published on the World Bank Public Sphere blog. It has been re-published with permission.