MIST Economies – hope for the future?

With the BRIC economies gradually becoming irrelevant, a new group of emerging economies has caught the attention of the investors. The MIST nations — Mexico, Indonesia, South Korea and Turkey — are the four biggest markets in the Goldman Sachs equity fund named GSYAX. These economies more than doubled in size in the past decade overtaking Germany last year. The common parameters that put these economies together are a large population, significant share of global GDP and common membership of G -20.

Jim O’Neill , of Goldman Sachs who coined the new acronym  said “ the MIST nations each account for at least 1 percent of global GDP and are likely to see that share increase this decade” Of the four countries, O’Neill said Mexico and Turkey have the most potential. Although the MIST nations have outperformed the BRIC nations by growth rate, they are much smaller in comparison to the BRICS in absolute size or population. Total GDP for the MIST nations was $3.9 trillion in 2012, which is less than one third of the $13.5 trillion BRIC economies. China alone had a GDP of 7.3 trillion according to Bloomberg. The MIST nations also have less than 500 million people, compared with a population size of 2.9 billion in the BRIC nations.

Despite being smaller in size, all the MIST nations have a stable domestic consumption with significant investment in infrastructure. Internet and mobile usage has significantly increased in these economies. All four economies ranked higher than the BRIC countries on the Geneva-based World Economic Forum’s 2012 trade openness index.

South Korea was ranked 34 out of 132 and Indonesia 58th. By contrast the earlier giants like Russia was much lower in position 112 and India at 100. The strengths of these nations are low labour costs especially in Mexico, a growing retail and manufacturing industry and strong exports. Mexico, Latin America’s second-biggest economy, recorded huge auto exports which helped it to outpace Brazil for a second year. This was in spite of a slow Chinese market. Indonesia has the fourth largest population in the world and is Southeast Asia’s largest economy. Although GDP per capita is only $4,880, Indonesia has potential domestic market with a strong middle class. Indonesia’s economic growth accelerated to 6.37%last year. It was fuelled by increase in domestic spending and investment. Indonesia has an added strength of being a financial centre for many Investment banks, as well as a growing energy sector. In Turkey, double digit growth in exports due to an increased focus on Africa and Middle East has helped generate growth.  A strong pool of entrepreneurial talent has diversified the Turkish economy. Turkey also has a strategic position of being a natural bridge between Europe and Asia. Turkey also boasts of tourism as a major revenue earner and its unsaturated markets are a hot destination for the FDI. The fastest growing economy in this group is South Korea with a per capita GDP of $ 27,000. South Korea has emerged as one of the fastest growing nations of OECD with a strong focus on R&D and retail. South Korea stands a little differently than the other three nations on parameters such as demographics, development and growth. South Korea was an emerging market almost twenty years ago and hence its inclusion in the group is debatable. South Korea lacks the young population of the other economies. Only 16% of the population is below the age group of 15 compared to 25% in the other MIST nations. However South Korea’s growth trajectory has been sharper than all the other three countries making it a role model.

Although the initial exuberating with the MIST economies is justified, the future projection needs to be realistic. The challenges to the MIST nations are varied. While Mexico faces the highest rate of corruption and organized crime, Indonesia faces a very complex regulatory environment and insufficient infrastructure.  South Korea’s aging population makes it heavily reliant on exports and thus vulnerable to global cycles. Turkey on the other hand faces a large current account deficit despite a growing tourism industry. Mexico suffers from sluggish investment, high vulnerability to global disturbances and high interest rates. The IMF projects the Mexican economy to grow 3 percent next year. According to IMF , Indonesia’s economic growth will slow to between 5 percent and 5.5 percent in 2014 -15 , compared with 6.2 percent last year .The Current account deficit is also expected to widen to 3.5% of GDP . Suitable fiscal and monetary policies in Turkey have stabilized growth rates to 3.8% although the current account deficits have increased and inflation is outside tolerance limits. The International Monetary Fund (IMF) has revised down the 2014 growth outlook for South Korea, due to exposure to global economic downturn.

Despite these reality checks, each of the MIST countries has potential for growth. The BRIC economies are plagued by excessive dependence on global demand especially China and Brazil. The high costs and administrative obstacles dissuade the foreign investor. Country specific issues such as lack of infrastructure in Brazil and India, the authoritative regime in Russia and the vulnerability of China speak of insufficient attention to the investor. In contrast, the cost advantage in manufacturing seen in Mexico, the young population in Turkey with the strong services sector, and the size of the domestic market in Indonesia are catalysts for future growth. With appropriate fiscal and monetary policies any mist on these countries’ future can be removed and the new bloc of emerging economies can satiate the investors’ appetite.

Contributed by Prof.Swaha Shome and Prof. Davinder Suri (Faculty, IBS Mumbai)

This entry was posted by Uncategorized . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *