Harvard Business Review | February 22, 2011
By Parag Khanna
What do Egypt, Iran, Pakistan, and Nigeria all have in common? They are very populous, Muslim-majority countries, all facing constant political unrest and on the brink of collapse. And yet they are also all part of Goldman Sachs' "Next Eleven," the much-anticipated extension of its fabled category of "BRICs" — comprised of Brazil, Russia, India, and China.
Perhaps no term has so captured the global analyst community since the coinage of "emerging markets" itself. Even international relations theorists have tried to make BRICs a concrete object of study at academic conferences, shunting aside traditional approaches to understanding rising powers. BRICs has also inspired comical copy-cats such as BRICSAM (adding South Africa and Mexico), CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa), and VISTA (Vietnam, Indonesia, South Africa, Turkey and Argentina).
Sadly, it seems that economists have been infected with diplomacy's proclivity for seeking to have their favorite state included in the hot club irrespective of merits. In doing so, they often fail to ask the right questions beyond which acronym rolls of the tongue most easily. By focusing on simple headline indicators like population size, GDP growth rate, and equity indices (Egypt's stock market grew ninefold from 2004-9), most analysts miss key questions like the degree of inequality and ethnic volatility, levels of unemployment and corruption, proportion of military control of the economy, whether a stable succession plan to the next generation of leadership is in place, the sustainability of investments, quality of economic diversification efforts, capacity to absorb commodity price shocks, and resilience to capitalize the financial sector in times of crisis.
Clever turns of phrase can fool many except those who actually spent time in emerging markets and ask tough questions. To research my first book The Second World: How Emerging Powers are Redefining Global Competition in the 21st Century, I traveled through over 40 such nations, and found that most of them are so deeply divided between their seemingly first world urban districts and business elites and their often largely third world masses and crumbling infrastructure (hence "second world") that it is unwise to predict their fate more than five years out. The events in Egypt were not the result of the rising expectations of the middle class, since the country barely has one despite its impressive growth rate in recent years. Rather, it has been a revolt of the alienated and marginalized — a phenomenon similarly underway in Libya, Bahrain and Iran. In such places, revolution is far from inconceivable, it is inevitable.
The fundamental instability of second world countries — which includes all the BRICs and the "Next Eleven" — hasn't stunted the ambitions of research reports which project straight-line growth to 2040. And yet already, three decades before Goldman Sachs' projections, it's increasingly commonplace to drop the "R" (Russia), leaving the more viable BICs as the new core of emerging markets. Still we should be concerned, for if you read the fine print of Goldman's projections for India, the prerequisites for India to achieve BRIC-like dreams includes improving governance, raising basic education achievement, increasing the quality and quantity of universities, controlling inflation, introducing a credible fiscal policy, liberalizing financial markets, boosting trade with neighbors, elevating agricultural productivity, and cleaning up the environment. As if this list isn't generic yet daunting enough, it makes no mention of the Maoist inspired Naxalite movement that has racked close to half of India's states.
I don't know what sexy acronym our leading investment banks' rock-star economists will come up with next, but I hope their indicators will start to factor in whether a large population is being harnessed or whether it is seething youth bulge, and whether economic growth is coming at the cost of ecological sustainability. More convincing than most of the countries celebrated as BRICS, CIVETS, or VISTA are places like Kazakhstan (perhaps add a "K" and spell BRIC correctly?) that have made tough decisions and cleaned up their banks, or Malaysia, which is diversifying its economy and beating the oil curse.
In my travels through dozens of emerging and frontier markets, I've concluded that they are highly differentiated and need to be understood one at a time, with regional trends often more significant than global ones. It is promising that Bank of America has just announced a partnership with leading political risk advisory firm Eurasia Group to provide geopolitical insights both for wealth management clients and to adjust portfolio allocations. This approach may not yield sexy categories like BRICs, but is far more likely to teach us that not all emerging markets actually emerge.
Parag Khanna, Ph.D, is a senior research fellow at the New America Foundation and author of How to Run the World: Charting a Course to the Next Renaissance, just published by Random House.