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Emerging markets: preferences, risks, performance ...

Article Excerpt
Abstract. The paper surveys the most important literature on emerging markets and their performance. Emerging market countries are defined here as the countries with low intuitional capacity in general, rather than the countries with particular economic characteristics and per capita income; although the latter is the predominant view in the current literature. The paper places particular importance on the legal system and legal order (compliance) in the transitional economies, stressing the importance of adequate regulation where even more advanced regulatory models, like market regulation, should not be totally excluded. Despite many common characteristics, emerging markets differ significantly one from another and it is very difficult, if really not impossible, to create one 'general theory of emerging markets' and its financial behaviour. Finally, the practice in the last decade or so, has proven that emerging markets are somewhat unpredictable and difficult to model.

JEL Classification Numbers: P5, P2, G1, G2, G3

Key words: emerging markets, Financial Reform, Market Performance, Transition Social Transition

1. Introduction

It is believed that the term 'emerging markets' dates back to the early 1980s when the original term 'emerging market economy' was firstly coined by Antoine W. van Agtmael, an economist with the International Finance Corporation (IFC), a private finance arm of the World Bank, to describe an economy with low-to-middle per capita income, which have been subjected to a serious reform intending to further their economic development. Initially the focus was on development economies in Asia, Africa and Latin America, which accounted for 80% of World's total population and only 20% of economic output. With the fall of the 'Iron Curtain' in 1989 and the serious focus on economic transition in the former communist countries in 1991, the term has been used indiscriminately to include the former socialist countries/economies (labelled as 'transitional countries'), developing countries outside Europe and some 'developed' countries that did not have extensive experience of capital market development (mainly due to having a bank-based financial system). Therefore the terms emerging market economies and emerging markets are somewhat imprecise today, and require the precise definition of the focus group in every particular instance. In this paper, we consider emerging markets as those in countries that have been subjected to an extensive programme of financial liberalisation, institutional capacity building and vast social restructuring.

We are fully aware that the range of countries included is fairly wide, and that the very 'emerging market' countries are quite diverse. Certainly, it is difficult to find far too many similarities between some transitional countries (for instance, Russia) and the new Asian rising stars (India, for instance). The former had completely different economic structure, property rights regime and political system, whilst the other group had a sound legal system, relatively stable property rights regime, and solid respect for law. Initially, transitional economies were highly promising, but over time, while some proved to be good performers (Central European Countries), others failed to profit from the opportunities given (East European Countries). Similarly, many promising emerging markets in Latin America in the 1990s experienced a series of systemic crises in the 1990s severely damaging their reputation as a potential investment destination. The financial crises experienced systematically in the 1990s, damaged many emerging market economies, underlining the imperfections and the problems associated with their existing institutional framework and ability to deal with market imperfection, market failures and risk management challenges. The countries in case differ also in size as China, with considerable economic power, and Bahrain are both considered emerging markets, although there is very little that brings them together in economic terms, except that they are both working on opening up their markets to the foreign entrants and putting themselves clearly onto a global economic map.

Models that were developed to describe 'industrialised countries', have proven themselves to...

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