Digital divide
The digital divide is defined as a lack of access to communication and computer technology for poorer sections of society. Reducing the digital divide is now at the core of poverty reduction efforts of many emerging market countries. Emerging market governments are trying to equip their populations for the knowledge-based economy by providing computers and internet access at government-run schools. The EIU’s digital economy rankings enable evaluation of a country’s digital readiness.
Patents
Patent and property rights provide strong incentives for investment and trade, and hence contribute to economic growth. As emerging economies produce new inventions and file more patents there is evidence of them moving up the manufacturing value chain. This helps sustain economic growth for emerging markets in the long run.
Transportation
Here the main focus is investment in infrastructure including roads, ports and railways. Reduced transportation costs improve productivity and accessibility. Better transport infrastructure in emerging market economies leads to better productivity, higher levels of private (inwards and foreign direct) investment, wider markets, increased specialisation and economies of scale.
Power
Power infrastructure includes installed power capacity as well as transmission and distribution infrastructure. The availability of reliable and inexpensive power is one of the most critical inputs for the growth of an emerging economy.
8. Human development
A nation’s greatest source of wealth is its people. Developing human sources of productivity has been a challenge for many emerging market countries. In most cases the millions of people living in emerging markets have not been trained for 21st century jobs in technology and science and industry. Thus, job training is now a major priority for many countries. This bodes well for upcoming generations who are learning new skills as these countries’ economies transition from those where agrarian low level skills are required to those that require modern technology and industrial skills.
Human development factors
Spending on education and health
Healthcare and education spending is an investment in citizenry that can spur economic growth. Education spending helps equip people with skills to compete in a rapidly evolving economy while healthcare spending reduces mortality and makes people more productive. Emerging markets have vast reserves of untapped productivity that can be unlocked by education and healthcare spending.
Investment in job skills
A 2012 UNESCO study says that $1 invested in job skills results in $10 to $15 of economic growth in developing countries. Due to a lack of resources in low-income, emerging market countries, governments need to promote policies and make big investments in equipping their populations with the skills required to thrive in an emerging economy.
Percentage of population completing secondary education
Secondary education is an important channel through which young people acquire vital skills to qualify them for good jobs. Lower secondary school extends and consolidates the basic skills learned in primary school while upper secondary school deepens general education and adds technical and vocational skills. As the percentage of the population that completes secondary education increases, the economic gap between the rich and poor closes and emerging countries are better able to compete in a global economy.
Social ranking
The social ranking is part of the total ESG (environmental, social and strategic governance) rankings released by Bloomberg. The ranking provides data on 36 Key Performance Indicators (KPIs) that Bloomberg has identified as important to understanding the long-term sustainability prospects of a country. For our purposes the KPIs have been weighted equally, but Bloomberg allows a user to customise the weighting.
The following table shows the 16 KPIs that have been taken into account to arrive at the final social rank of our 18 emerging markets.
9. Environment
The environment is a hot topic for emerging markets as it is for the developed world. The smog levels in Beijing, for instance, are as much of a concern to the Chinese planners as they are to activists around the world. How to balance the growth and industrialisation with the environmental is a challenge.
The carbon footprint, rising sea levels and global warming are major concerns and solutions will need to be devised by nations with competing interests. This might result in a whole new set of businesses revolved around alternative energy, increasing forested areas, biodiversity and water quality. Many emerging nations are taking the lead in this. Brazil, for example, gets a top rank in rainforest preservation.
Environmental factors
Environmental rank
For environmental factors there are again a set of KPIs from Bloomberg by which countries can be measured. The KPIs focused upon here are shown in the table below, with each being weighted equally.
10. Capital markets
Investors want to know how safe their investments are from malfeasance, fraud and scandal. Integrity of capital markets is paramount for emerging countries that want to raise public and private funds from outside investors, institutional investors and private equity investors, in order to fund development for infrastructure or perhaps to expand business.
The breadth and depth of capital markets is based on companies traded volume transacted. It is also important to know the supervision and trustworthiness of market information along with role of insiders and transparency. These issues are front and centre for investors who in exchange will risk their capital for perceived profits. In many countries state-owned enterprises and large domestic corporations seem to have entrenched interests making it difficult for competitors to create and manage companies and achieve profits.
Many emerging markets embarked on reforming their financial markets to allow for reasonable competition and proper disclosure and transparency. In many emerging markets there are independent supervisory authorities which oversee local exchanges where securities are traded.
Capital market factors
Capital markets
In order to measure the breadth, depth and efficiency of the capital markets of emerging countries the Financial Development Report 2012 published by the World Economic Forum has been used. The seven pillars defined below make up the overall index rankings:
1 Institutional Environment: encompasses financial sector liberalisation, corporate governance, legal and regulatory issues, and contract enforcement.
2 Business Environment: considers human capital, taxes, infrastructure, and costs of doing business.
3 Financial Stability: captures the risk of currency crises, systemic banking crises, and sovereign debt crises.
4 Banking Financial Services: measures size, efficiency, and financial information