Question 2

"What emerging realities do you see in light of the emerging economies? Which among these new economies do you feel would outpace the others? Quote examples and facts to support your argument."

There have been certain trends with emerging economies since the 1970’s. The first major riser among the developing economies was Mexico, which benefited from its proximity to the United States. Its economy proceeded to crash in 1976 and three further times since. Another major early riser was South Korea. Again it benefited from proximity to Japan, a developed economy. It also proceeded to crash twice. Other such examples include Argentina and south-east asian economies. This basically tells us two things:
Ø Emerging economies typically rely on a developed country in order to rise
Ø Eventually after some level of economic success, it crashes back.

Examining the reasons for the same:

Emerging economies usually benefit from comparatively low labor costs, which translates into lower input prices for suppliers. This shifts the labor supply curve down, resulting in a lower equilibrium wage. This results in lower factor costs for the developed nation firm and this phenomenon has gradually lead to the buzzword – outsourcing.

Why should this in the long run cause the rhythmic upsurge and crashing of the emerging economies? This is primarily because of a concept known as capital glut and the equalizing of the relative costs of labour between the developed & emerging market. During the years of rise of an emerging economy, there is a whole lot of interest in the assets of that nation and the prediction of future cash flow from those assets. This causes prices and values in that country to rise disproportionately to the actual possible future cash flows that can be derived from the assets. This creates a bubble which when bursts crashes the economy.

The current emerging nations are India, China, South Korea & Brazil. The Indian & Chinese economies though are slightly different with respect to the previous emerging economies- specifically for three reasons that could ensure they delay the inevitable backlash and buck the trend of rising & falling of emerging economies:
Ø Due to the sheer volume of their population: Until now, emerging markets were seen as production centres and not as sizable selling markets. Also for a small population, such as Mexico, the movement from a nation with a small percentage of world class consumers to a nation with a sizable percentage of world class consumers was far faster, and hence the factor cost advantage was very quickly lost. This hastened their curve of rise and subsequent decline. In economies of India & China, the percentage of world class consumers is still small and thus elongates the emerging economy curve. The upshot is that India & China are still seen as viable centers of production and remain markets for selling goods as well.
Ø Innovations in products that expand the size of the available market: In India & China we have seen innovations in products that basically extend the size of the market. For example in automobile sector, Tata Motors in India has come up with the Nano that increases the population base capable of owning a car. In China, similarly we have cheaper bikes and cars as well as an interesting innovation in the electric bicycle that again increases the population base capable of owning an automobile. India also witnessed the launch of the sachet, that further expanded the consumer base for consumer goods.
Ø The planned economy of China: The planned economy of China is a massive buttress against fall for them. Because the economy is clearly under Govt. control, and the population as well, it is somewhat insulated against any withdrawal of foreign investment in China as the govt could take suitable control measures to tide over any downward spirals.

Thus we see that the Indian and Chinese economies are the best fits to first of all delay and in China’s case prevent as has been seen about 35 times over the last 35 years, the seemingly inexorable repeated rise & fall of emerging economies