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Interview: Ronald Haddock, Booz & Co.
Zurich-based partner and vice president at Booz & Co., Ronald Haddock, talks about why the future of the global economy might not rest in the East after all.
January 10, 2011 4:15 by Jay Akasie
The last mile of rail laid in India was in 1947 – the year the British left.
Today the country’s infrastructure is a mess. How does this affect India’s attempt to become a serious player on the world stage?
Lack of infrastructure in India is a major impediment – it makes it difficult for companies to develop relevant economies of scale. The government will have to play a major role in addressing this, yet more business people would say the government itself is the problem, due to high levels of corruption. What’s interesting to note is that the industries that have been the most successful in India are those that are the least dependent on India’s road and transport infrastructure. The IT industry, for example, has a low degree of dependency on this infrastructure, but need telecom infrastructure instead, much of which is controlled by private companies.
What qualities do Western financial markets and economies have that emerging markets do not? What institutions do they have that emerging markets do not? Why are these distinctions important in realizing the global rebound rests in the West?
Many Western financial markets are highly evolved, with transparency, liquidity, rules of law, and sophisticated institutions that regulate them. These traditions and institutions took decades to develop. Nearly all financial meltdowns in the West can be attributed to the failure of policies or institutions, and following every crisis, innovation in institutions, policies, and products provided the springboard for the next wave of growth in the financial services industry.
Most emerging markets are still at the early stages of development, and lack institutions to the same degree of what we have in developed markets, which raises the “price’ of investments and transactions. This creates a situation in which it is more expensive to fund companies and governments in emerging markets than developed markets. As a result, fewer new companies are being created in emerging markets or being financed in optimal ways.
On the flip side, many emerging countries are poised for such strong demographic growth that they can grow rapidly, even without sophisticated financial markets. But they do so with less certainty and greater risk, as investments are frequently made on the basis of momentum as opposed to fundamentals. The losses companies sometimes face can be very large when they makes bets based on high-level indicators such as population or income growth, without looking under the covers at more precise figures related to profitability, such as margin development.