Why emerging market countries have an edge

By Chrystia Freeland
October 29, 2010

Tony Hsieh and Sanjay Madan wrote the program to create LinkExchange over a weekend. Before the following weekend, they had more than a dozen websites participating in their ad-sharing network. Over the next several weeks they worked frantically on the project. They refined their business in real time, learning—quickly!—from their mistakes. Less than a year later, the Harvard grads were offered $1 million (U.S.) for the company. Less than a year after that, they sold it for $265 million.

That was 1996. Since then, this story of development on the run has become commonplace. Hacker culture is now part of the broader culture: “beta test” is in the dictionary, and we accept innovative, albeit imperfect, beta releases even from multibillion-dollar global behemoths such as Google. We’re prepared to accept flaws because the tech revolution is progressing so quickly that it is usually better to be fast, and possibly wrong, than to try to be perfect and end up being slow. By the time your flawless product is released, it will likely be obsolete.

Technologists aren’t the only people operating in a rapidly changing, uncertain environment. Thanks both to the tech revolution and to globalization, that is true of all of us, including our governments. But, as Nobel-Prize winning economist Michael Spence argued at a private equity conference in Quebec City this week, emerging-market governments seem to be better at dealing with an unpredictable, volatile world than Western ones. They are like Silicon Valley entrepreneurs—willing to act swiftly, even if it means making mistakes. Leaders in the West are more like Detroit, reluctant to make bold moves until it is too late.

Part of the problem is the way we judge various types of mistakes. Spence argues that we make two types of mistakes—implementing a bad idea, and failing to act on a good one. If you are religiously minded, you could think of these as sins of commission and sins of omission. In stable times, sins of commission are probably worse. If your industry isn’t changing very much or if your country’s economy and the world economy are on an even keel, launching an expensive new product or government program that fails is probably more damaging than missing out on a great opportunity.

But in times of radical change, making a mistake is less risky than doing nothing at all. Spence thinks that emerging-market leaders understand this better than Western ones do, and he cited the examples of China’s fast and big stimulus program after the financial crisis and the Indian government’s willingness to act to burst asset bubbles.

The effectiveness of China’s government—especially in contrast with the paralysis of some Western nations—is often understood as evidence of the greater agility and decisiveness of authoritarian states. Spence’s analysis suggests another phenomenon could be at work. Emerging-market leaders—both the democrats and the dictators—are more accustomed than their Western counterparts to fast and disruptive change: They’ve experienced revolution, hyperinflation and devaluation. That may give them an edge in today’s volatile global economy.

Speaking at the same conference, Glenn Hutchins, co-founder and co-CEO of private equity firm Silver Lake in New York, said that in the corporate world the heat is shifting from Western companies to ones in the emerging markets. In the past, he said, developed Western economies were “the best crucible” for coming up with the most appealing inventions and the most effective business practices that were then exported to the rest of the world. But Hutchins, argued that emerging markets, with their rapid growth and demanding, low-income consumers, were turning out to be a tougher—and therefore better—hothouse for pace-setting companies than the West.

“It used to be that to be a global company you had to forge your business model in the crucible of competition in North America,” Hutchins said. “Today what you are seeing is companies that are growing up … whose business models are being forged in the crucible of competition in the emerging markets.”

American financiers haven’t been getting a lot of praise lately for their skill at capital allocation. But the speed with which the smartest investors, such as Hutchins, have grasped the shift of ideas to the emerging markets is impressive. Western politicians could do worse than to follow their example.

8 comments

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[...] emerging markets have an edge Posted on October 29, 2010 by L.B. Jeffries In this opinion article from Reuters, Chrystie Freeland looks at why some economists believe that ‘developing’ [...]

Chrystia:
You tend to write about analyses that I had previously thought of as pretty obvious, but nobody seems to see it nor talk about.

Thanks. Americans need to see the obvious more readily, and factor them into their opinions before they open their big mouth, or, ludicrous mouths for some.

AKA: Too many people, particularly in this pre-election period, yell and scream condescendingly, but their claims contradict the obvious. Yet, they don’t get it, as if smearing will score by making the public feel that they have no responsibility. In fact, it will enhance the negative consequences down the lin, and further the fault of those who are failing in their responsibilities.

Posted by jo5319 | Report as abusive

Once again this writer fails to grasp the simplest of answers. Growth markets/countries are growing because the west have found a whole new group of people to exploit. Their governments eager to fill their coffers gladly avoid worrying about regulation, safety or their own environments. I suppose you would like to turn us back to the 1800s and turn the country back over to the rubber barons? Your clueless.

Posted by fromthecenter | Report as abusive

It is amazing how many times Freeland can write virtually the same column, yet never hint at the truth.

Emerging market countries have an edge because they work for 1/5 or less than what a Western worker will earn. The Western worker cannot compete because his cost of living is five times higher.

Fronts for outsourcers like Americans for Tax Reform constantly try to tell us that outsourcing will create jobs in the USA, yet the number of available jobs here never seems to rise.

Freeland wrote: “By the time your flawless product is released, it will likely be obsolete”

And because the USA has no privacy protection laws, identity theft has become one of the few growth industries because newbies like Mark Zuckerberg of Facebook have no clue what privacy implies.

Freeland wrote: “The effectiveness of China’s government . . . is often understood as evidence of the greater agility and decisiveness of authoritarian states”

Being an authoritarian state is only part of the story, otherwise Russia would be a true world power instead of a minor bully. China is the world’s first capitalist country; the USA has always only been a home for individual capitalists. China’s industrial espionage is world-class and all Chinese companies demand foreign entities to hand over trade secrets. And China’s treatment of its workers is no different than how robber barons in the 1800s treated their workers.

http://saucymugwump.blogspot.com/

Posted by saucymugwump | Report as abusive

The writer leaves out the biggest reason for the EM edge. They have bottomless pools of cheap labor.

It is not possible to do much of anything cheaply in the developed economies. You can afford too make mistakes in the developed economies or you will be sued by your former consumers.

The developed world also has so many vested interests in terms of land use restrictions and facilities design and safety, that anything that requires physical development becomes very expensive before it is even begun. The developing world is only now starting to deal with those issues.

Rather than boost products that are shoddy mistakes brought too quickly to the market to try to keep the developed economies in the lead (seems like that will be it’s doom actually – the cheaper labor countries will be able to do that better and still win in the market and shoddy mistakes can be costly to recall) it would be a better policy for the developed world to try to lower the cost of living of its labor pools. It could take generations for the labor costs of the emerging countries to reach the developed markets levels.

But that will work against those interests that are afraid of deflation. Maybe we just spend too much for the house, the cars, the educations, health care and the basics now. The Chinese don’t want rampant real estate speculation and this country can’t seem to live without it.

What on earth do you expect US and European politicians to learn from India, Singapore, Indonesia, China or Latin America?

BTW – why did anyone pay $250 million for what sounds like little more than computer based “Want advertiser”. Those classified add type papers are usually given away free at the grocery store? Facebook type products aren’t the kind of thing I would pay for if they weren’t sponsored by their advertisers.

Posted by paintcan | Report as abusive

Let’s not forget some of the emerging markets have recorded
Unprecedented economic growth rate. I don’t see nations in Africa and Latin America as well in EU and America have the same. For certain, they know something we don’t.

Posted by bkhjon | Report as abusive

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TY for the helpful info! I would never have gotten this by myself!