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Aimlessly lived years: why investors avoid the developing economies

Tuesday, 06 January 2015 11:55

And prefer to blow bubbles in the developed markets

For the last three years the MSCI Emerging Markets index showing profitability of investments in emerging markets lost about 17%. The investors taking shares on peak values of 2007, are still in minus for 25%. The S&P500 index for the same time added 43%, having forced all investment world to speak about "bubble" in the American market again.

Why after crisis of 2008 the investments into developing markets persistently lose to the USA and Europe?

And why "big money" chooses actions of the developed countries already risen in price more willingly, and are not going to come back to the developing? 

Of course, the policy of FRS directed on gradual turning of the stimulating programs doesn't inspire optimism in investors in the developing economies. But the deal is not in it. The sad situation in the financial markets in many respects reflects fundamental problems which economies of developing countries faced. The old model of growth is settled, and transition to new rails demands time, resources and political will. In other word, reforms.

Two main engines of GDP growth —growth of manpower and labor productivity. The first in developing countries, with rare exception, is much presented. And here labor productivity perfectly grew while there was an effect of low base. In process of development of economy each new percent of GDP growth demands the increasing capital investments.

It is no secret that a large number of developing countries are "raw economies", the increase in prices for raw materials in the 2000es years became a basis of their prosperity. Staple prices grew against significant increase in consumption of raw materials in China which began the movement on a way of industrialization of economy. The capacities which are strongly cut down during recession in the 1990es didn't keep up with the growing appetites, and staple prices rose by leaps and bounds.

Unfortunately, massive inflow of money to raw economies almost didn't go for the future and was generally spent for improvement of welfare of the population. Towards raw export these countries pay for an economy distortion in chronically high inflation and unpleasant dependence on the world prices for raw materials. On a twist of fate from all developing countries the lowest relation of capital investments to GDP at Brazil, Venezuela, South Africa, Russia and Indonesia. All this classical raw economies, and all of them suffer from delay of rates of a gain of GDP not the first year.

But even growth of investments into fixed capital (if it was) isn't always transformed to labor productivity growth. Paul Krugman, the Nobel Prize laureate on economy, in 1994 in the article "Asian Economic Miracle" questioned long term of strategy of infinite investment into fixed capital without labor productivity growth. At the some point the countries cease to cope with flow of money, the currency excessively becomes stronger, return of investments falls. The root of the current problems is in this.

China faced a similar problem. Impetuous growth of capital investments led to a situation when the volume of monetary injections considerably exceeded labor productivity growth. And eventually it caused competitiveness loss, falling of profitability and blowing of a bubble in the market of real estate. The government of the People's Republic of China fights against all this, allowing the unprofitable companies to go bankrupt, reducing the volume of credit resources in economy. Now the Chinese authorities focus attention on "quality of GDP", but not on impetuous growth.

Everything would be fine, but China became the world's largest importer of raw materials.

And the policy of controlled braking of economy of China ricochets on economies of the countries delivering raw materials to it.

The similar situation generates an array of problems, the most unpleasant of them is the growth of political instability. Most of investors perfectly understand that an outcome of this story is still ahead, and don't hurry to invest money in the markets having good chances still to fall in price.

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