Almost a decade ago, the prospect of emerging markets burnt brightly; predictions were made about how certain countries would effortlessly gain entrance into the league of developed economies. However, after the melt down, the brightness dimmed and the apparent cracks that had been shielded from informed view began to show. In what seemed like a strange contrast – as some advanced economies picked up after the global meltdown; emerging markets experienced a broader-based slowing of growth.
As the scaffolds came apart, conjectures were made, questions were asked, answers were given, but understanding how the supposedly coveted investor’s destination went south, grappling to recover its steam years after the melt down is not always found in the pages of economic theories. Most of the postulations of our empiricism will not suffice. Analyzing this without the necessary local intelligence would provide ideas, but never resolve the pertinent issues.
A very important feature of emerging market is largely unattended to in most analysis, which poses a hidden threat to any recovery effort. Perhaps, it is time to pour some realism over the theoretical construct built around emerging markets. One glaring mistake most investors make in their foray into emerging markets is that they often judge a book by its cover. They take a quick dive into a business, based entirely on a brilliant business plan and, soon realize that the ‘so called’ entrepreneurs with compelling credentials from ivy-league schools are just incapable of delivering returns. For the most part, the entrepreneur has nothing but a golden head supported by clay feet.
In fairness to some of these entrepreneurs, they do not set out to fail; they are just ill-equipped to handle the pressure and perhaps underestimate the challenges in their fields. The investors soon realizes that not all that glitters is gold, however the winning streak will commence when we flip the coin to realize that the real entrepreneurs in the emerging markets are often like rough diamonds. They may not necessarily know how to articulate themselves flawlessly or put together a seamless business plan with the right global indices and investment, but they usually have a proven track record of navigating the tough economic space; they have grit to bite their way through the dense systemic corruption and they have local intelligence in averting the ineptitude that is a fall out of their culture. Yet they have no access to capital because of the lack of information and their limited exposure.
Albeit their limitations, they have consistently stayed profitable and are concerned about the sustainability of their businesses.These are the gems that should be discovered. These are the guys that hold the key to unlocking the wealth in emerging markets, but investors need a new pair of eyes to understand this and avail them the capital needed to achieve an economy of scale that can produce astronomical profit.
Emerging markets, though different due to their peculiar characteristics, have certain similar traits that run through them. Revitalising the growth prospects of most emerging markets will depend on having a keen insight in unpacking the strands of their structural and cultural tapestry and how they impact the economic space. There exists within the market, non-empirical in-situ cultural forces at play. A closer look at Africa, shows a continent, bedeviled with infrastructural lapses, grappling with democratic ideals and inadequate skills to sustain the pace of growth and further reinforced by other unique fault lines and challenges rooted in culture, religion and ethnicity.
African’s are usually communal people; merit is constantly trumped on the back of tribal sentiments. Ethnicity is stronger than ethics. They over indulge in politics, in ways that endanger their businesses. Some pursue cash and not necessarily passion, they are in business first for the money. Sometimes, business resources are spent on prestige projects that have minimal value, but impact heavily on their egos. They have a culture of profligacy and expend business resources on personal vanity project. They perpetuate the class war between the rich and the poor, and seek to preserve the status quo ante that benefits them. They feel entitled to a new car and a chieftaincy title when they cross a particular profit threshold. Any cash is profit. Investing in innovation is not yet ingrained. Are there exceptions? Yes, but almost insignificant in number. Does it mean that there are no opportunities? Definitely not!
The fact remains that opportunities are often surrounded by these complicated cultural challenges. When investors choose to get apprehensive over the challenges, they miss out on huge opportunities to access wealth. However, when investors focus on the opportunities and undermine the challenges, they get burnt in the process. These cultural factors are not going away anytime soon. A healthy approach will require an appreciation of both with equal equanimity.
We can bridge the gulf between the global investors and the emerging markets in a way that is viable and sustainable. This is why the conventional approach to investment will be inadequate for most emerging markets. There are no ready-made templates, but emerging markets require a different investment model. This new model would be a hybrid of conventional and unconventional – structuring a better corporate governance system that restrains excesses and provides an incentive scheme that caters mildly to vanity. There has to be a strong training policy, because where you cannot stop the business owner from hiring his incompetent relatives, you can get him to train them regularly. This model retains the veneer of the global investment template, but focuses on understanding the orientation and the peculiarities of the emerging market in order to achieve better balance and high quality growth.