Finance & Investments

Over the years, the phrase "emerging market" has become all but meaningless. No group that includes China, Argentina, Kenya, the Philippines, and Romania can possibly qualify as a single coherent class. 

To pick the likeliest winners in this vast category, Jim O'Neill of Goldman Sachs has given us the BRICS (Brazil, Russia, India, China, and now South Africa), the "Next 11" (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea, and Vietnam) and, more recently, MIST (Mexico, Indonesia, South Korea, and Turkey). Robert Ward of the Economist Intelligence Unit has added the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa.) 

But all these constructions include a dizzyingly diverse set of economies that don't have much in common.

We live in a crisis-prone age.

The countries that are best positioned to prosper are those that are resilient as well as strong. That's why pivot states, those able to build profitable relationships with multiple partners without becoming overly reliant on any of them, are the likeliest winners in the G-Zero era. 

Brazil will continue to enjoy excellent trade ties with the United States. But China is now its largest trade partner, helping Brazil's economy ride out the U.S. slowdown with minimal damage. NATO membership gives Turkey lasting influence in Brussels and Washington, and many in the Arab world look to Turkey as a dynamic, modern Muslim state. Add its position at the crossroads of Europe, Central Asia, the Middle East, and the former Soviet Union, and Turkey has a range of political and commercial options. As in Brazil, this advantage helps absorb the sorts of shocks that are now all too commonplace. 

Asia is home to several pivot states. Indonesia, with nearly 240 million people, enjoys a well-diversified economy with trade ties balanced among China, the United States, Japan, and Singapore. Vietnam receives most of its aid from Japan, its arms from Russia, and its tourists from China; its biggest export market is the United States.

Not all pivot states are developing countries. Far-sighted policy ensures that Canada is now less vulnerable to a slowdown in the United States. The percentage of Canada's exports to countries other than the U.S. jumped from 18% in 2005 to more than 25% just four years later.

The likeliest losers in this more volatile world are shadow states, the opposite of pivots, those whose political and commercial possibilities are determined almost entirely by a single powerful partner. Mexico's largest sources of foreign currency are oil sales, tourism, and remittances from nationals working abroad. In all three cases, the vast majority of that currency comes from the United States.

Mexico's domestic- and foreign-policy choices are determined by its political process, not the demands of a domineering sponsor. But when compared with Canada, Mexico's commercial opportunities and the speed of its development are largely defined by conditions inside one foreign country.

Ukraine, another shadow state, wants to escape Russia's gravitational pull and become a pivot state, preserving relations with Moscow while building new ties with Europe. In fact, Kyiv wants to ink a free-trade deal with the European Union. But Russia has threatened to sharply increase the price of natural gas shipments to Ukraine and throw up new trade barriers if Kyiv moves forward with Europe. The EU, for its part, will end trade talks with Ukraine if it joins a customs union with Russia. Ukraine can't win because it can't pivot. It lacks the strength and independence to improve its bargaining position with either side.

Source: Harvard Business Review