Inventing "Emerging Markets"

The Friday Column: What's in a name? Trillions of dollars possibly. Reflections on the promise and limits of branding from "emerging markets" to "BRICs" to the "Silk Road" ...And Hat-Tips to Readers

What’s in a name? Trillions of dollars, possibly.

That’s not quite the spirit of Shakespeare’s Juliet when she famously asked that question in a moment of lament, concluding “that which we call a rose by any other name would smell as sweet.”

But Dutch economist and prominent emerging markets investor Antoine van Agtmael knows that names matter. After all, he coined the term “emerging markets” in 1981, a stroke of genius that has lasted four decades and transformed investing in developing countries, paving the way for massive flows of capital to places formerly known as the “Third World.”

A few years ago, in his Washington DC office at Foreign Policy magazine, van Agtmael told me the origin story of the birth of the term “emerging markets” and I’d like to share it for the first time as it remained buried in my notebook. I recall this story as I thought a lot this week about how the naming and framing of regions, countries, historical moments, and companies can have dramatic effects on our perceptions.

When van Agtmael was a young investment officer at the International Finance Corporation, the private sector development arm of the World Bank Group (a place I worked in the early 2000s), he had pitched an idea for a diversified investment fund that would target developing and emerging economies -- in 1981 terms, the “Third World.” He had developed the idea after spending four years in Thailand as a banker, and surmising that Asia and developing countries might be the future of investing.

“I went to Salomon Brothers in New York to give a talk before a group of prominent investors,” he told me. “The idea was to create a diversified third world equity fund. In fact, that’s what it was called,” he said with a bemused smile: “Third World Equity Fund!” Not an ideal name, even back then, in 1980-81.

“After giving the presentation, someone got up and said to me: “Great idea! Terrible name.’ And he was right.” That weekend, Van Agtmael said, “I was in a very bad state because I was just obsessed with finding a better name for this fund. I thought and thought and thought and then I came up with this term ‘emerging markets.’” He proceeded to write a memo and prepared to show it to his boss on Monday.

“When I presented the idea to my boss, I told him that ‘Third World Equity Fund’ does not inspire confidence. I told him: we should call it ‘emerging markets.’ Honest to God, he looked at the memo and said: ‘yes, that’s what we’ll do.’ It was a 30 second decision that had a very deep impact in how people started to perceive these markets.”

In an official IFC history of that moment, the organization writes: “‘Third World’ was a term that connoted extreme poverty, shoddy goods, and hopelessness to many at the time. But ‘emerging markets,’ van Agtmael would later write, ‘suggested progress, uplift, and dynamism.’ It reframed the picture, in time becoming the universal term used in the financial world to describe investment in developing economies.”

The rest is history. Today, emerging markets have become a routine asset class that makes up a diversified portfolio of stocks and bonds. The most widely cited MSCI Emerging Markets Index of some 1380 stocks across 27 countries has a market capitalization exceeding $8 trillion. In our ever globalizing world, retail investors can buy shares in Chinese electric car makers or Brazilan banks with the swipe of a finger.

But as Van Agtmael notes, it was not as simple as a branding exercise, and it still took several years before IFC could raise enough money to launch a fund. When I asked him about how the term “emerging markets” changed the history of investment, he said simply: “We gave people a new way of looking at these markets. But it was still very hard. At the time, many looked at these markets as casinos. I remember once we were even attacked for this idea of taking money and investing it in these crazy ‘casinos.’ I remember a big meeting when I boldly said a statement that made everyone laugh, around 1981/82. I said: ‘just watch, in 10 years, foreign portfolio investment will be larger than what the World Bank, the IMF, and the IFC provide to developing countries.’ By 1990, that was the case.”

Van Agtmael got the last laugh as he went on to launch his own successful emerging markets fund with a group of partners. After some ups and downs (more on that in a later interview), the fund grew from $25 million to roughly $25 billion through classic buy-and-hold value strategies across the emerging markets.

When reflecting on the coining of “emerging markets,” he also added: “I am happy that we helped to retire the term Third World that came from the French, Tier Monde,” Von Agtmael said.

So, one epiphany of branding from a Dutch economist knocks out another moment of branding, of sorts, by a French historian. The “Third World” is another example of very sticky branding - but one that didn’t quite turn out the way its originator intended. The French historian Alfred Sauvy coined the term in a magazine article in 1952. He used it as a Cold War framing exercise. Namely, first world countries consisted of those in the US-led NATO and capitalist bloc, second world countries referred to those in the Soviet bloc, and the third world referred to the rest, mostly in the non-aligned camp. He was thinking in French Revolution terms of the Third Estate, the commoners of France who opposed both the nobles and the clergy.”

But “Third World” in later usage came to be a catch-all phrase for poor and underdeveloped countries, losing its original meaning. It became even something of a slur, as in “Third World infrastructure” or “Third World banana republic-style politics.” 

Aha, but wait, where did banana republic come from? That’s another one that has entered our political lexicon seemingly effortlessly. The American writer O. Henry coined the term in 1904 to describe Honduras and other Central American countries highly dependent on a single resource such as bananas or minerals, and exploited by U.S corporations in the late 19th and early 20th centuries. The name stuck and, of course, has become a popular retail line of clothing, though in political terms it still carries the scent of tropical dictators, Western men in khaki suits doing dirty deals with corrupt local bosses, and impoverished peoples. Wikipedia has a good entry on the origin of the term banana republic here.

When Van Agtmael was launching his private emerging markets fund in 1988, Russia was still behind the Iron Curtain, China did not have a functioning stock market, Brazil was, as Van Agtmael said “an economic mess” and “India was a huge bureaucracy and you were not allowed to invest there.” Thirteen years later, on November 30, 2001, a Goldman Sachs economist published “Global Economics Paper - No 66.” It was a routine investment banking research product, but its impact was profound.

The title of the paper was, “Building Better Global Economic BRICs,” and the lead author was Jim O’Neill. The paper launched the term “BRICs” - Brazil, Russia, India, and China -- as the investment destinations of the future. Over the next few years, money began pouring into the BRICs and BRIC-theme funds sprouted. The acronym was so successful that it spawned regular heads of state meetings of the “BRIC” countries, and even spawned country jockeying to be added to the list (eventually, South Africa made the cut, and the term became BRICS).

This begs the critical question: what’s up with these economists and their slick branding strategies? Ok, that’s not the real question. The real question is this: how much did the framing of BRIC contribute to the massive flows that went to those four countries over the next few years? How much did branding matter?  It would be impossible to tell, but if anybody has seen such a study, please send it over.

My hunch is that the term BRIC played a considerable role in that heady moment when capital was flowing to Brazil, Russia, India, and China, just as “emerging markets” played a significant role in transforming “Third World” equities to exciting investments.

The term “BRIC” had its fair share of critics who complained that the five countries had little in common economically and its connections were loose at best. Emerging Markets also has its share of critics, including Emerging World fellow traveler and subscriber and global geo-stragetist and author Parag Khanna who declared his distaste for the term in our interview here. Still, the “emerging markets” term has stood the test of time, though BRICS has not aged as well.

In 2007, Goldman tried again to capture the moment with a new framing of eleven disparate developing countries, calling them “The Next 11.” It never really caught on. Others tried to replicate BRIC. Remember MINT? Mexico, Indonesia, Nigeria, Turkey? Fidelity Investments launched that one in 2014, and Jim O’Neil liked it and promoted it, but it remained in the shadow of BRICS.

I, too, am guilty as charged with acronym creation. I came up with HUBBS, to denote the key trade hubs of Asia - Hong Kong, United Arab Emirates, Bombay, Shanghai, and Singapore, writing at the time that “these four cities and one country – [the HUBSS] — represent the most crucial commercial and economic gateways for emerging Asia, and its links to the world.” 

Of course, we intuitively understand that terms like “emerging markets” and “Third World” and “banana republic” and “BRIC” or “MINT” or “HUBSS” are man-made acronyms, unlike more enduring geographic terms like “the Middle East.” Well, think again.

The “Middle East” was actually coined by an American naval strategist, Alfred Thayer Mahan, writing in a British policy journal in 1902, in an article entitled “The Persian Gulf and International Relations.” Mahan wrote: “the Middle East, if I may adopt a term of which I have not seen," should be an area of emerging strategic interest for the British navy, mostly because of its location halfway to India. I wrote about this a decade ago in The National.

A part of my article is below:

Today, when we speak of the Middle East, we are broadly referring to the Gulf Cooperation Council states (GCC), as well as Iran, Iraq, the Levant and North Africa. This has become the standard regional paradigm in the minds of strategists and political leaders, in the western world and also in, well, the Middle East. In fact, one of the leading pan-Arabic newspapers, a Saudi-owned daily, is called Asharq Al Awsat, Arabic for "Middle East," and Arabs and Iranians regularly refer to their region as the same.

There is a problem with this regional name, however, particularly in regard to the GCC countries. While it only marginally captures a sense of the political geography of the region (the world can look a lot different from Marrakech to Muscat), it fails entirely to capture the region's commercial geography or its cultural geography of historic intermingling with India, Iran and even China in the early years of Islam. But more relevant to today, GCC trade with Asia far surpasses trade with the Arab world.

So, should we purposely call the region “West Asia” and or come up with another name? I don’t think so, but we should change our mental maps so we do not think solely in terms of legacy names and political geography. We need to think in terms of commercial geography. Just because the World Bank or some other institution declared a region “MENA” - Middle East and North Africa — that does not mean we should limit our minds to those borders.

Having spent a great deal of time in Dubai and the UAE, I got a sense of this broader picture. From Dubai, it’s a two hour flight to Mumbai, but it’s a four hour flight to the “Middle East” city of Beirut. Ships that land in the Jebel Ali port come from all across Asia, Africa, Europe, the Americas, and, yes, the Middle East too. When Emirates Airline launched in 1985, its first three destinations were Karachi, Delhi, and Mumbai.

One way to understand commercial geographies better is to follow the traders and businesses. They do not limit their horizons to geographies declared by long-deceased naval strategists or multilateral bank bureaucrats. Though hat tip to the long-deceased German baron Ferdinand Von Richtofen who coined the term “Silk Road” in 1877 (Hat tip to reader Naciem Nikkah who wrote to Emerging World: “But do you think we should refer to the modern ‘silk road’ as the ‘silk routes’ since historically there were always multiple routes that connected these trading posts rather than just one major road!” My answer: yes!). And hat-tip to whomever came up with the evocative and accurate term Industrial Revolution. (Hat tip also to World Economic Forum Founder Klaus Schwab for his 2016 concept and far-sighted work, The Fourth Industrial Revolution).

More on commercial geographies, Silk Roads (new and old) and Industrial Revolutions (first to fourth) in upcoming columns.

In the meantime, fellow travelers, have a great weekend and good week ahead.



Fellow Travelers: All Who Subscribe Are “Fellow Travelers,” but all who share our interest, hopes, nostalgia, and pain are also fellow travelers in the larger sense. Thank you to those fellow travelers whom I reached out to on your reading, watching lists…Keep ‘em coming. We’ll come up with an excellent crowd-sourced Emerging World reading, watching, hearing list.

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What We’re Reading, Watching, Hearing, etc..

Afshin: I’m currently reading The Last Kings of Shanghai: The Rival Jewish Dynasties That Helped Create Modern China. Waiting on my bookshelf is Midnight in Cairo: The Divas of Egypt’s Roaring 20s and A Hundred Sweet Promises, a novel by the celebrated Iranian-born musician Sepehr Haddad, and on my pre-order list is fellow traveler Michele Wucker’s You Are What You Risk: The New Art and Science of Navigating an Uncertain World. My magazine read of the week is fellow traveler and always insightful scholar Karim Sadjadpour’s excellent piece in the Atlantic on Iran.

What fellow travelers are reading, watching, etc…

  • Fellow traveler Karim Sadjadpour highly recommended Homeland Elegies by Ayad Akhtar.

  • Another fellow traveler wrote in to say: “I love the idea of ‘borrowed nostalgia’ you wrote about in a previous post. I would love to know what other readers ideas are on nostalgia, borrowed or otherwise.”

  • And a hat tip to fellow travelers who have shared Johnnie Walker stories based on my original Friday column. More on that soon.

  • And finally, fellow traveler and emerging markets investor and thinker and ReadyAI CEO Roozbeh Aliabadi pointed me to this bit of humor straight out of the headlines on LinkedIn.

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