The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) --Emerging markets have been red hot for a while. Becoming steamy is easy when money is flowing in from all directions: governments stimulating demand, investors chasing returns and foreign investors eager to secure a place in the next big market. Spending money that is easily available is just not that difficult.
Putting those dollars to use to make money is much harder. For many emerging markets, this is the next challenge. Making money requires businesses to deliver products and services that compete on cost efficiencies and/or innovation. Efficient production cannot be premised on low-cost labor alone because this is unsustainable. Sustainable efficiency requires infrastructures and country/company cultures that support productivity.
An environment for continuous innovation is even harder. It requires the right education and incentives, the freedom to think and question, accepting failure, and high-risk finance. Failures to create this environment have done in millions of companies, and a number of countries. Finding this formula in an emerging market is unlikely.
This makes increasing efficiency job one for many emerging market. The Japanese took this path by embracing quality management in the 50s's long before it was popular. Their early embrace gave them a competitive efficiency advantage that paved a path to the world's second largest economy.
Today, developing efficiencies probably falls into the category of being a mature science, although technological innovations are still pouring forth. This means that most efficiencies will only offer an ephemeral advantage, expediting the need for an environment for continuous innovation to sustain growth. Still, the tasks to secure efficiencies are not simple, particularly for countries like India who seem to have inefficiency in their cultural DNA.
According to the World Economic Forums Competitiveness Index (CI), the greatest challenge faced doing business in India is the lack of suitable infrastructure. Corruption and an inefficient bureaucracy aren't far behind. India's infrastructure isn't bad, it's awful. It ranks below Ethiopia. Out of 139 nations, India ranked 90th on road quality and 110th on electricity supply. These rankings were worse than those in 2009.
Some have suggested focusing on transporting India's efficient information technology services via the internet, thereby avoiding issues of its hard infrastructure. The problems with this are expansion is limited by educational availability and India's very low internet penetration rate of 6.9%. Africa is 11.4%.
There is a ray of hope. The government is finally permitting foreigners to invest in infrastructure. Progress has been reportedly made, although the CI indicates, relatively speaking, that it's not advancing the country's position. Just the same, there won't be any miracles of an instant modern infrastructure like we saw in China. India is a democracy. They can't just uproot people to blaze transportation avenues, and there are tons of people to uproot. India's 1.2 billion people represent 17% of the world's population, but only 2.3% of its land. They have packed about four times the U.S. population onto one-third the land.
The people are not packed in cities either. In the U.S., 74% live in urban centers. In India 62% or 750 million people live in rural areas. The challenges don't end here. Construction companies have had trouble finding skilled workers. One report noted that 53% of India's youth suffer missing employable skills. These skill shortages affect efficiencies in cost, quality and completion time.
The importance of infrastructure to efficiency and economic growth can't be overstated.The inverse relationship between the increased time to transport goods and growth in trade is well-known. So is the impact transportation delays have on working capital turnover. Now consider the impact of an inefficient infrastructure serving 15 million retail outlets, 90% of which are independent. In the U.S., there are 900,000 retail outlets, including about 11,000 Starbucks and 14,000 McDonalds.
India ranks 134th out of 178 countries on literacy. This also hurts efficiency. More than 300 million people are illiterate. Worse, some say this is an underestimate because the criterion for literacy is someone being able to sign their name.
Communication inefficiencies don't stop there. There are 35 languages in India spoken by more than one million people. Hindi, the national language has the highest number of speakers but this is just 40%. Creating central communications would make the EU's task of translating communications into 23 languages seem easy especially because there is virtually no illiteracy to accommodate in the EU. This costly task is complicated further by India's low rate of tax collection. According to the NY Times only about 3% of Indians pay taxes. In the U.S., taxpayers exceed 50%.
Where corruption roams, inefficiency is in tow and corruption in India is rampant. Ironically, one reason it flourishes is because it's easy to sell expedited services in a country hopelessly clogged. India ranked 87th out of 178 countries on Transparency International (TI) 2010 Corruption Perceptions Index. This is worse than their 2009 ranking. One TI survey showed that over three months millions of Indians living on less than $1.30 per day paid about $220 million in bribes to secure basic services.
It's self-perpetuating: inefficiency drives corruption and corruption drives inefficiency. Tackling this problem won't be easy. Even if people were inclined to file charges, The
Times of India
reported that it would take 320 years to clear the backlog of 31.28 million cases. A whopping 10% of GDP is tied up in disputes. How productive is that?
When cases come to court, after 10 or 20 years, the memories of witnesses can be unreliable. To counter this problem a new brand of police has emerged called encounter specialists. Their job is to kill criminals if it's believed that the courts will absolve them or forget them by the time their case is scheduled. That's one for Indian efficiency - hopefully their guilt isn't in question.
The License Raj is the nickname given to the ill-fated system of permits and controls put in place ostensibly to prevent private enterprise from exploiting the poor. Dismantling the License Raj began in 1991, but it's taking time. In 2010 India was ranked 134 out of 183 countries on the World Bank's Ease of Doing Business Index, which ranks countries on the efficiency of their regulatory systems to promote business.
Heading the list of unreformed laws are labor laws which make for a horrendous impediment to efficiency. Reducing wages, layoffs and closures for any private firm with more than 100 employees requires hard-to-get government permission. While law-abiding foreign employers have to take these laws seriously, the Indians have developed two work-arounds: (1) An informal economy at 83% to 90% is the world's largest. No wonder tax payers are in such short supply. (2) When a company reaches 99 employees they create another one.
Emerging markets, too hot or not, seem certain to offer better long-term growth prospects than the developed world, particularly through the next phase of developed world deleveraging. However, no country's economic trajectory is guaranteed. Prospects will vary greatly by country, by regions within countries, and based on current challenges.
Developing products and services that are efficient and innovative is a challenge that many emerging markets face today. Some will struggle more than others, particularly when macro variables like culture and politics are ill-suited to the challenge.
Readers Also Like: