Emerging Markets in Times of Regulatory Uncertainty

Ever since emerging markets have been a source of revenue, market diversification potential, and – above all – hope to develop nations around the world from within with international trade and knowledge transfer. Starting from post-World War extensions of economic productivity into every corner of the world, emerging markets bloomed during the Washington Consensus market liberation era of the 1990s. The early 2000s saw fruitful extensions of emerging markets and a trend to globalize international national value chains. Though with the 2008/09 World Financial Crisis, globalization trends seem to stagnate. Ever since 2010, the world has drifted into what is called ‘slowbalisation’ – this slowing of globalization is characterized by reduced trade in goods and services across borders resulting in less imports and exports. Multinational profits, capital flows, and Foreign Direct Investment (FDI) transfers are declining, with stocks of cross border bank loans plummeting. Emerging markets saw a declining trend in the share of countries catching up since 2007. This trend is coupled with a decline in interest in emerging market profits due to overall market uncertainty given geopolitical tensions and regulatory uncertainty. This paper discusses these novel developments and gives an outlook of positive and negative implications of slowbalisation and regulatory uncertainty. As for upsides, existing literature suggests that emerging markets and international trade may have hindered emerging nations to develop their own country-specific comparative advantages and got stuck as sole minor value chain compartment providers. Now lifting international trade pressure in the wake of nationalism and reshoring may help these nations to develop their own production and industries that are aligned with their cultures and social needs of the population. This may eventually and hopefully lead to a broader range of goods and services offered around the world and more diverse innovations given they are more likely to come out of different parts of the world and are generically grown. As for downsides, international trade benefits rolled back may decline international development and business capital and fiscal space for developing nations. The hope of knowledge transfers and peace through international value chains and strategic economic alliances wanes in a world of production silos and disconnected economies. Regulatory uncertainty – as the uncertainty surrounding regulatory shifts and changes on a constant basis – may also instigate positive and negative effects on emerging markets. For instance, regulatory uncertainty leading to a reshoring of international activities may steer opportunities to grow infant industries of emerging markets that are more meaningful to their people than just serving one minor part of a global value chain and international conglomerates operating carelessly and detached from national cultures. This kind of regulatory arbitrage may help create innovative and diversified economic growth that is experienced to be more natural and sustainable than value chain dependency and regulatory pressures from abroad. At the same time, regulatory uncertainty may draw people to classic stable market options, such as gold and classical art, which naturally leads to a drying up of financial flows into emerging markets, limiting fiscal space for country development. The discussion highlights future perspectives and actions for emerging markets to flourish due to regulatory uncertainty abroad.