In Part 1 of this series I suggested that the mere fact the emerging markets are growing faster than developed markets is no reason to overweight the former in our portfolios. In Part 2, I took issue with the very question of whether most of the emerging societies will actually emerge, given questions about the historical developmental model.

But I have a third concern about EM. When we calculate the level of development of a society we tend to do so in economic terms. For example, the World Bank considers any country with a per capita GNI (gross national income) of less than about US$4,000 to be “developing,” i.e., emerging. More broadly, an emerging country is one in which a broad economic middle class, representing the bulk of the society, has yet to develop.

But no country has successfully “emerged” and persisted as a polity without also evolving socially, that is, developing a robust and inclusive civil society. Former UN Secretary General Kofi Annan once described a developed society as “one that allows all its citizens to enjoy a free and healthy life in a safe environment.” Note that he said nothing about economics.

When I refer to a robust civil society, I am thinking – I recognize the possible eurocentricity of this, but the facts on the ground seem to support me – of such attributes as these: a central government strong enough to deliver public services and keep the domestic peace; at least rudimentary social justice; rule of law; protection of property rights; protection of minorities; freedom of speech and assembly; some form of democracy, representative or otherwise; a written constitution; women’s rights; and so on. In other words, the things we take for granted in the developed West but which hardly exist in emerging societies.

Civil societies, in the West or otherwise, don’t ordinarily evolve quickly or peacefully. In Britain, France and the US, democracy developed only over a period of hundreds of years – the Magna Carta was signed by King Charles in 1215(1), but the primacy of Parliament wasn’t settled until the Glorious Revolution of 1688. All three countries fought revolutions, the two that had kings committed fratricide, and many civil wars were fought before democracy was secure.

It’s a sad fact of human history that almost all governments, from time immemorial right up to the present, have been oligarchies, that is, government by small, self-appointed elites who manage everything for their own benefit. These elites might be pharaohs and their courts in Ancient Egypt, kings and their aristocrats in Europe, Communist Party leaders in China, wealthy family networks in Latin America,(2) or Islamic fundamentalists in Iran. Oligarchic societies are run by and for the benefit of the few, and if the “many” want to move power to the people they will likely have to do so by force.

New democracies can be quite fragile, viz., Weimar and Egypt. But once democracy takes hold it tends to be the most robust form of government possible in an imperfect world, and it allows economic growth to continue unabated for, well, practically forever.(3)

As I look around at the principal developing societies of the world, I doubt very much that many will develop acceptable civil societies any time soon. True, most of these are smaller and more obscure countries in Latin America, Asia and Africa. But even among the BRICs I see a lot more economic progress than social progress, and unfortunately economic growth is a necessary but insufficient condition for achieving developed-country status.

Among the larger developing countries, it seems to me that India is the one most likely to achieve a robust civil society. The country already has a reasonably well-functioning democracy, for example,(4) and a small but influential middle class. Unfortunately for India, the strength of its democracy pales in comparison to the challenges the country faces. So, yes, India will likely emerge, but the time frame for its emergence may be measured more in centuries than in decades.

Russia and Brazil possess fledgling, fragile, democracies(5) which could go either way. Unfortunately, they also have the least robust economic futures. Russia is almost completely reliant on a declining energy industry and it is staggering under a rapidly aging and declining population. Brazil, unfortunately, turns out to be more or less an economic client state of China. It used to be said that when the US coughs, the emerging markets get a cold. It is now the case that when China hiccups, Brazil chokes to death.

Which brings us to China, where economic growth has vastly outstripped social progress. The country is rated Not Free by Freedom House, and no wonder: it’s utterly controlled by a small group of Communist Party members (the oligarchic elite) who have spent more than half a century enriching themselves at the expense of the Chinese people.

For China to emerge will require not just more economic growth – which is slowing rapidly, by the way – but vastly more social progress. It will require, in fact, nothing less than the overthrow of the Communist Party by the people. If such a revolution happens, China will be in chaos for many years and will likely splinter into numerous independent or semi-autonomous regions along the lines of the late, unlamented USSR. If such a revolution doesn’t happen, China’s economic and social progress will continue to slow and it will never “emerge.”

The list of countries that enjoyed rapid economic growth but which never emerged (or emerged only later, when a healthy civil society was established), and which often collapsed altogether, is a long one and goes back to the beginning of human civilizations. Just off the top of my head I think of Rome after the overthrow of the Republic; the Italian city-states in the 15th and 16th centuries;(6) Spain and Portugal; early 20th Century Japan through Tōjō; Germany under the Third Reich: Italy under Mussolini:  Argentina, especially, but most of Latin America in the 1980s; the Soviet Union(7) and every one of its East European satellites; Iran, to some extent, under the Shah; and so on.(8)

It’s possible, of course, to invest in an unfree society and make money on it, but it’s a bad bet. The investment experience in China, especially compared to the growth experience in China, illustrates the point. So I believe it would be unwise to be seduced by the growth story in EM. When we start seeing serious political progress in developing societies it might be time to make the overweight-EM trade. But don’t hold your breath.


(1) And was promptly annulled by Pope Innocent III. The Great Charter lasted less than three months.

(2) I am referring especially to the institution of the encomienda, installed by the Spanish conquerors across Latin America. The encomienda subjected indigenous peoples to rule by a Spanish nobleman, not unlike the institution of serfdom in the Middle Ages.

(3) [This is a longish footnote, even by my standards, so if you’re pressed for time feel free to skip it; it has nothing at all to do with the main post.] People often say something like, “Sure, the US is the world’s oldest democracy, but it’s only been around for a bit over 200 years. The Roman Empire lasted a thousand years.” Well, not exactly. The Roman Empire began in 44 BC when Julius Caesar overthrew the Republic and then had himself anointed perpetual dictator, and it ended in 455 AD with the third(!) sack of Rome, this time by the Vandals. So call it 500 years. Still, you are arguing, if Curtis can do the math, 500 years is a lot longer than 200, so how can he claim that democracies are a more robust form of government? Let’s do a little of what I’ll call Curtisian-Einsteinian math just to see if this argument is correct. The key fact to keep in mind about this higher order of math is that time is relative. What’s important is not how many “years” a society persists, since the concept of “year” is itself relative, but how many slings and arrows a society can withstand before it gives up the ghost. If those slings and arrows come along like, say, molasses in January, a society can persist for a lot of “years” and still be quite brittle. On the other hand, if those slings and arrows are coming along like tweets from Anthony Weiner, a society had better be pretty damn robust. Time in the Roman era moved much, much more slowly than time does in the modern world. To illustrate just how much slower, let’s do a small thought experiment. Imagine you are Roman Emperor Marcus Aurelius (c. 170 AD) and you’ve decided to send a delegation to London to complain about the condition of Hadrian’s Wall. The delegation would make the trip in about 1,000 hours, with serious danger at every turn. Many times, the delegation wouldn’t make the round trip successfully, and poor Marcus would have to try again and again. But let’s give him the benefit of the doubt and say the old fellow got it right the first time. So 1,000 hours it is. Now, let’s imagine instead that you are Prime Minister Enrico Letta of Italy in mid-2013. You decide to send a delegation to London to complain about tariffs on Fiats. The delegation would be there in 4½ hours, and that counts travel time to and from the airports. In other words, this particular sling made it to London 222 times faster today than it would have in 100 AD. So while it’s true that the Roman Empire lasted 500 “years,” in modern terms the damn thing persisted for a mere 27 months.

(4) I say “reasonably” because, in the 65 years since Indian independence, someone from the Nehru-Gandhi family has been prime minister for 40 of those years. This sounds more like an electoral monarchy.

(5) Brazil has been independent since 1822, but it suffered under the Portuguese version of the encomienda and it’s current democracy – they tend to come and go – has been in place only since 1979. The future of the Russian democracy is a complete unknown and will continue to be until Putin is out of the picture. Freedom House currently ranks Russia as Not Free.

(6) The Italian city-states were more or less direct descendants of the Roman Republic. Cities such as Cremona, Genoa, Lucca, Pisa, Siena and especially Florence, Milan and Venice, became phenomenally rich and powerful after the 11th century. All but Venice rather quickly declined into principalities, and eventually, Venice, too, became a strict oligarchy after La Serrata (the closing), a series of political acts which froze out everyone except a narrow elite from participation in the government and trade. By 1500 Venice was in serious decline.

(7) My freshman year in college I took Economics 101. I don’t remember much about the course (it met at 8 a.m. on Saturday morning, talk about a dismal science) but we used Samuelson’s classic text. In it Samuelson confidently predicted that the USSR would overtake the US as the world’s largest economy by 1984. In the 1989 edition of the book, published the very year the Soviet union collapsed, Samuelson wrote, “Contrary to what many skeptics had earlier believed, the Soviet economy is proof that … a socialist command economy can function and even thrive.” Obviously, I wasn’t the only one nodding off.

(8) All this is laid out in wonderful detail in Daron Acemoglu and James Robinson’s terrific book, Why Nations Fail.


Next up: Submerging Markets? (Part 4 – And then I’ll shut up about this)

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.


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