Emerging markets are not the answer to our productivity gap

By Mohammed M-Hasan on Feb 28, 08 09:42 AM in Emerging Markets

The last few months have been very gloomy across western economies. The US has been in meltdown and more remains to some based on most commentators.

Europe has continued to perform strongly but has suffered form a lack of structural change which has left cost structures in the Byzantine era. This is made worse by the newly found nationalist sentiment in France and Germany in particular.

So where is there any good news and what hope can we in the UK have for future economic growth?

Emerging Markets have long been touted as the key area for growth, with Eastern Europe, Asia and the Middle East being the preferred examples. This either because they have vastly growing middle classes such as in India and China or favourable locations for locating manufacturing facilities such has been the case in Eastern Europe.

The problem with all these assertions though is that they fail to understand the basic opportunities that emerging markets provide.

First, any single emerging market is a collection of distinct subcultures. When people talk about the Middle East, they often mean the Persian Gulf, a geographic grouping of 6 sovereign states. This sub region has tremendous diversity in terms of local culture, business practises and opportunities.

Second, emerging markets only offer an opportunity if we seek to invest and support them. Developing local skills, investing in local communities are just as important part of business practises as having a dreaded CSR strategy in the UK (more on CSR another time!).

Thirdly, consumers in emerging markets are not the answer to economic stagnation in the west. Whereas China and India have hungry consumer markets and a growing middle class, they do not posses, on a purchasing Parity, the economic strength to consumer products in sufficient volumes or premiums which will plug a gap from a slowdown in the UK.

Furthermore, in the case of China in particular, the majority of these goods are due to be manufactured locally anyway so the value add to Europe is limited.

My point is that whereas emerging markets offer opportunities, they are not immediately likely to offer us a goldmine of economic prosperity. We must rely on our own productivity, which has been sorely lagging and is an insult to the traditions and history of our forefathers, to dig us out of this hole.