Economics Archives

The Costs of Denial in Economic Growth

Jun 2, 2026

High-angle view of Algiers features bustling traffic, historic architecture, and vibrant city life. by Adem via Pexels

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The Costs of Denial

Center for Global Development

by Shantayanan Devarajan

June 01, 2026

When countries experience rapid economic growth and falling poverty, leaders and development partners often overlook governance problems lurking beneath the surface. Citizens, meanwhile, encounter corruption, favoritism, and state dysfunction in their daily lives. Over time, trust erodes. In some cases, public frustration reaches a breaking point, triggering political upheaval, economic crisis, or even civil conflict. The result is almost always slower growth and lost development gains.

In a recent working paper, I show how this pattern has played out across three regions.

Middle East and North Africa

During the first decade of this century, countries across the Middle East and North Africa (MENA) enjoyed rapid economic growth, declining poverty, and—contrary to popular belief—stable or falling inequality. An international institution labeled Tunisia as “a model country.” Yet Gallup’s Life Satisfaction surveys consistently ranked MENA as the unhappiest region in the world.

The reason was a breakdown in the region’s social contract. Governments had long provided public-sector jobs, free health and education services, and subsidized food and fuel in exchange for political acquiescence. As growing numbers of young people entered the labor force, governments could no longer deliver enough public-sector jobs. Citizens responded by taking to the streets. The Arab Spring overthrew four long-standing presidents and was followed by devastating civil wars in Libya, Syria, and Yemen. Much of the region has since experienced stagnating per-capita incomes; MENA is now the only developing region where poverty is rising.

Sub-Saharan Africa

Between 1995 and 2010, Africa’s GDP growth rate doubled and poverty began to decline for the first time in decades. The optimism was palpable. The Economist, which had once labeled Africa “a hopeless continent,” ran a cover story, “Africa Rising.”

Many observers noted that the boom had not been accompanied by significant structural transformation or improvements in human capital. Weak governance remained a major constraint. Still, the prevailing view was that the governance reforms that improved macroeconomic management would sustain growth and overcome these weaknesses.

That optimism proved misplaced. When commodity prices fell in 2014, per-capita growth collapsed and has remained close to zero ever since. Governance weaknesses have even undermined macroeconomic policy: today, roughly half of African countries are either in debt distress or at high risk of it.

South Asia

Sri Lanka and Bangladesh illustrate similar dynamics. Sri Lanka entered 2020 with serious fiscal vulnerabilities. Large tax cuts caused the fiscal deficit to balloon, and the country effectively lost access to international capital markets. Rather than restructuring debt and seeking IMF support, the government continued servicing creditors from dwindling reserves while financing deficits through money creation. Two years later, the country defaulted. GDP contracted by 7 percent, inflation reached 70 percent, and a popular uprising forced the president to resign. Although the economy has since stabilized, Sri Lanka has lost a decade of growth.

Bangladesh presents a different but equally instructive case. Over several decades, it achieved rapid growth, sharp poverty reduction, and social indicators that often outperformed those of India. Yet governance problems remained pervasive. In 2003, Bangladesh was ranked the most corrupt country in the world. Policymakers and international partners treated this coexistence of strong economic performance and weak governance—the “Bangladesh paradox”—as an intellectual curiosity rather than a warning sign.

Public resentment, however, continued to build. In 2024, student protests over public-sector job restrictions grew into a nationwide movement against the government, ultimately forcing the prime minister to flee the country. The resulting uncertainty has significantly weakened investment and growth.

What can be done?

If periods of rapid growth encourage leaders and development partners to deny governance problems, and that denial ultimately fuels instability, three lessons follow:

Treat growth episodes with caution. Strong economic indicators should not crowd out other measures of social well-being and political legitimacy. The low life-satisfaction scores in MENA before the Arab Spring were an early warning that many ignored.
Embrace transparency. Open discussion of governance failures is far healthier than denial. Acknowledging problems does not undermine growth; suppressing them often does.
Use periods of prosperity to undertake governance reforms. Every reform creates winners and losers. Growth generates resources that can help compensate those who bear the costs. Good times are therefore the best times—not the worst—to address governance weaknesses.

The central lesson is simple: governance problems do not disappear during periods of rapid growth. Ignoring them merely postpones the reckoning. In many countries, the cost of that denial has been measured in lost growth, political instability, and, in the worst cases, violent conflict.

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Egypt Advances Disaster Risk Financing Strategies

Jun 1, 2026

A flood impacts an abandoned house by the Nile River in Cairo, Egypt. by Eslam Mohammed Abdelmaksoud via Pexels

Egypt advances disaster risk financing through national workshop

31 May 2026

Source(s): United Nations Office for Disaster Risk Reduction – Regional Office for Arab States

Photo of participants of workshop sitting at table discussing and talking

UNDRR

Egypt is taking important steps to strengthen its financial resilience to disasters and climate-related risks through the development of a national disaster risk financing strategy.

Government institutions, United Nations agencies, and national stakeholders gathered in Cairo for a national workshop jointly organized by the United Nations Office for Disaster Risk Reduction (UNDRR) and the United Nations Development Programme (UNDP), in coordination with the National Committee for Crisis Management and Disaster Risk Reduction affiliate to the Prime Minister’s Office.

The workshop marked an important milestone in supporting Egypt’s efforts to strengthen risk-informed public financing, enhance preparedness and recovery policies, and reduce the growing impacts of disasters and climate-related shocks on communities, infrastructure, and the national economy.

Strengthening risk-informed financing approaches

The workshop brought together representatives from national and government institutions to discuss the foundations of a comprehensive national approach to disaster risk financing and resilience planning.

Discussions focused on the key determinants and overall structure for developing the national strategy, including frameworks and approaches for disaster risk financing, and the classification of disasters and risks. In the workshop, international experiences and good practices related to preparedness financing and response were discussed.

Opening the workshop, Raidan Alsaqqaf, Deputy Regional Director of the Regional Office for Arab States at UNDRR, highlighted the increasing impacts of disasters on public finances, livelihoods, infrastructure, and essential services across the region. He emphasized:

“Countries that have clear and pre-arranged financing mechanisms are better able to protect the most vulnerable groups, maintain essential services, accelerate recovery, and reduce long-term losses.”

Additionally, in his opening remarks, Ghimar Deeb, Deputy Resident Representative of the UNDP Country Office in Egypt accentuated that “No single financial instrument can efficiently address all risks. Effective disaster risk financing protects people, livelihoods, public finances, and critical infrastructure. Therefore, the development of a Disaster Risk Financing Strategy aims to provide the Government of Egypt with a structured framework of financing instruments to respond more effectively to disaster-related losses.”

Building partnerships for resilience

The workshop further strengthened collaboration between government institutions and UN agencies working to advance resilience and sustainable development in Egypt. It also provided an opportunity to identify the next steps for the development of the national disaster risk financing strategy, stakeholder engagement, institutional coordination, and implementation framework.

The initiative reflects the growing partnership between UNDRR and UNDP in supporting governments across the Arab region to strengthen risk-informed development, disaster resilience, and financing approaches that link climate adaptation, preparedness, and sustainable development priorities. Strengthening disaster risk financing is also critical to protecting development gains, sustaining economic resilience, and ensuring continuity of essential services during crises.

As climate and disaster risks continue to affect economies and communities across the Arab region, strengthening disaster risk financing is becoming increasingly important to support prevention, preparedness, resilient recovery, and long-term development planning.

Enhancing International Cooperation on Climate and Trade

May 30, 2026

Enhancing International Cooperation on Climate and Trade through the Lens of the Global Stocktake

Trade policy is emerging as a critical tool for accelerating global climate action. The growing intersection of climate and trade policy could present opportunities for enhanced international cooperation.

Over the years, trade issues have been raised under the United Nations Framework Convention for Climate Change (UNFCCC) process, with parties holding different views as to whether it is an appropriate forum to discuss trade-related climate measures (TRCMs). Nevertheless, at COP30, Parties agreed to discuss “opportunities, challenges and barriers in relation to enhancing international cooperation related to the role of trade,” starting in June 2026. The Global Climate Action Agenda (GCAA) also launched a dedicated channel or “activation group” on climate and trade.

The Paris Agreement highlights that the outcomes of the global stocktake (GST) should inform Parties in enhancing international cooperation for climate action (Article 14, paragraph 3). In this context, the GST decision reaffirms that Parties should avoid arbitrary, unjustifiable, or disguised restrictions on international trade. Hence, trade policy may serve as a vehicle for implementing GST outcomes and strengthening international climate cooperation.

As they prepare for the climate and trade dialogues, Parties and non-Party stakeholders could consider how TRCMs can enhance international cooperation to accelerate the outcomes of the first GST (GST1). The GCAA is aligned with the GST1 and can support these efforts.

Accelerating the outcomes of GST1 through trade

Climate and trade are both intimately connected to sustainable development goals. Several GST1 outcomes can be linked to economic sectors and have target dates, providing a useful framing for climate, sustainable development, and trade agendas to converge. These include tripling the global renewable energy capacity and doubling the annual rate of energy efficiency improvements, and the transition away from fossil fuels (TAFF) in energy systems to achieve net zero global emissions by 2050.

TRCMs can enhance international cooperation to achieve relevant GST1 outcomes, advancing sustainable development goals in the context of the Paris Agreement. Properly designed and implemented TRCMs may foster and enable:

climate-resilient supply chains through diversification, transparency, risk management, and circular economy approaches

technological innovation towards climate solutions

cost-efficient low-carbon products and technologies with green industrial policies and market mechanisms that incentivize production and consumption of low-emission goods

interoperable technical frameworks, i.e., those linked to emissions measurement, reporting, and verification, carbon accounting, and life cycle assessments. These frameworks can support policies that foster market recognition and differentiation of sustainable products and infrastructure

local value generation, including fiscal and labor-related benefits linked to foreign investments, the upskilling and reskilling of the workforce across clean technology supply chains, and community benefit-sharing for the extraction and processing of transition minerals and metals.

International equity considerations should be embedded in TRCMs, recognizing equity’s importance for a just transition.

The Role of National Policies and Trade Agreements

National policies are a critical vehicle for advancing GST outcomes and can have implications for trade. For example, green industrial policies, such as subsidies for the development or production of renewable energy technologies, may alter the costs of traded goods. Simultaneously, trade policies supporting open and resilient economic systems impact climate goals.

Climate-focused trade agreements, such as the Agreement on Climate Change, Trade, and Sustainability (ACCTS), demonstrate that trade can drive cooperation towards achieving GST goals such as TAFF and tripling renewable energy capacity and doubling energy efficiency. For example, fossil fuel subsidies reinforce economic inefficiencies and slow the transition. The ACCTS is the first legally binding trade agreement to introduce specific provisions restricting fossil fuel subsidies, thereby reducing some forms of government financial support that would otherwise obstruct the TAFF. Tariff and non-tariff barriers on renewable energy products raise the cost associated with these technologies. The ACCTS reduces trade barriers for environmental goods and services, including those related to renewable energy and energy efficiency. This can reduce the cost of accessing these goods, enabling economies of scale and sourcing from the lowest-cost producers.

Looking Ahead: Informing GST2

The second GST notably culminates in 2028, coinciding with a mandated high-level event on climate and trade, in the context of the UNFCCC climate and trade dialogues. And the GCAA with climate action plans or “plans to accelerate solutions” run through at least 2028.

This alignment creates an opportunity to examine how and whether trade could inform GST2.

Catalina Cecchi Hucke, Senior Manager for International Strategies, Center for Climate and Energy Solutions

Vision 2030 and the Iran War: A Stalemate Overview

May 29, 2026

Majestic Saudi Arabian flag illuminated against the night sky, surrounded by cityscape lights in Riyadh. by Jepoy Fabian via Pexels

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Vision 2030 and the Iran War: Saudi Arabia’s Resilience Under Strain

Featured image credit: Saudi Boy via Shutterstock

Kristian Coates Ulrichsen

Arab Center Washington DC

Three months after the United States and Israel attacked Iran on February 28, 2026, the conflict is at stalemate: The ceasefire that began on April 8, 2026, has neither yielded a political settlement nor an agreement to reopen the Strait of Hormuz to shipping. This state of limbo has disrupted global supply chains and caused other economic strain across the world. For Gulf states that rely heavily on the Strait for exports and imports, the war has exposed severe economic vulnerabilities. Iranian ballistic missiles and cheap, abundant drones have damaged critical infrastructure, hurting investor sentiment and raising insurance costs for shipping. The war’s economic and energy impact has been greatest in Kuwait and Qatar, which currently lack viable alternatives to the Strait of Hormuz for the export of oil and liquefied natural gas, respectively.

Compared to its neighbors in the Gulf, Saudi Arabia is in a relatively advantageous position. The kingdom’s sheer size means that most tourism, cultural, and sporting events can continue despite the war. On April 25, 2026, for example, at a time when many events in other Gulf countries had been canceled, nearly 60,000 fans packed the King Abdullah Sports City stadium in Jeddah for the final of the Asian Champions Football League. Saudi Arabia’s access to the Red Sea and its existing energy transport infrastructure have given the kingdom greater resilience during prolonged disruption. More mundanely, the alternative export and logistical routes offered by Saudi geography make the war less likely to challenge the underlying principles of Riyadh’s economic diversification model. This is especially because prior to the war, the kingdom had already begun to pivot away from the massively expensive real estate ‘giga-projects’ associated with Vision 2030 and toward sectors like artificial intelligence (AI) and renewable energy. The external shock of the Iran war might also serve to boost investment in domestic industry and supply chain resilience, in which case the conflict will have helped speed up policy shifts that were already underway. For Riyadh, the war brings less a new economic direction than confirmation that its earlier decision to adopt fiscal realism was correct.

The Saudi Advantage

The existence of ports and energy facilities on Saudi Arabia’s west (Red Sea) coast and of cross-country infrastructure such as the East-West pipeline and road and rail freight corridors have given the kingdom options to bypass the Strait of Hormuz for significant (although not all) flows of oil and volumes of goods. These are not failsafe alternatives: the capacity of the East-West pipeline cannot fully compensate for the loss of oil shipped by tankers via Hormuz, for example, so exports have fallen by about two million barrels per day (b/d) from prewar levels. A significant portion of refined products and petrochemicals at facilities on the east (Gulf) coast remain shut in by the closure of Hormuz, while oil facilities at the Red Sea terminus of the pipeline are within range of missiles and drones.

The East-West pipeline has enabled the kingdom to maintain a higher proportion of its prewar oil exports than any Gulf state except Oman.

The East-West pipeline has enabled the Saudi authorities to maintain a higher proportion of its prewar oil exports than any Gulf state except Oman, whose ports lie beyond Hormuz with direct access to the ocean. Opened during the Iran-Iraq War in the 1980s, the pipeline has rarely been used to capacity but has proved its value in the present conflict. Its ability to carry seven million barrels of oil per day from the fields in the east (five million of which are destined for export, the remainder for domestic use) far exceeds the capacity of other pipelines in the GCC region. Nevertheless, exports from west coast ports, including oil from Yanbu, remain vulnerable should Yemen’s Houthis resume attacks on Red Sea shipping, in which case the Bab al-Mandab would become a second chokepoint effectively closed for trade. Ironically, the return of oil tankers and maritime services to Saudi Arabia’s Red Sea ports after the Iran war began indicated how the kingdom’s prior concerns about risk, which had soared during the Houthis’ November 2023-September 2025 Gaza war campaign against shipping, were quickly re-evaluated once Iran blocked Hormuz.

With the kingdom’s oil exports remaining at between 60-70 percent of prewar levels, and its economy benefiting from the cushion of oil revenues from prices that soared after the conflict began, it is the secondary and knock-on effects of the Iran war that are more applicable to Saudi Arabia. Saudi Aramco reported a 25 percent increase in first-quarter profit (benefiting from higher export levels in January and February 2026 and then the elevated price levels in March), but an unexpected surge in government spending due to the war meant the budget deficit rose sharply and recorded its highest-ever quarterly deficit. Loss of output from refineries and petrochemical plants, as well as from the fertilizer and aluminum sectors, have hit economic growth. Meanwhile, the drop in oil production will affect natural gas output, which is used in domestic electricity generation. In each case, the impact of the disruption will grow the longer that the standoff with Iran continues and the longer that industrial cities and ports in the Gulf, such as Ras Tanura and Ras al-Khair, are affected, and will be reflected in second quarter results when they come in over the summer.

Impact of the War on Saudi Economic Strategy

More broadly, the Iran war has brought into focus key political economy challenges facing Saudi Arabia as the leadership marked the 10-year anniversary of the launch of Vision 2030 in April 2016 and is reassessing key objectives and policy priorities. This process predates (and is unrelated to) the Iran war and is part of a reallocation of government spending away from mega-projects, such as the futuristic city The Line, the ski resort Trojena in Neom, and the Mukaab skyscraper in Riyadh, which were suspended before the war began.

The suspension of these projects indicates that Crown Prince Mohammed bin Salman and those around him are more receptive to financial constraints and fiscal realities than when the projects were announced in 2021-22. The impact of the war is likely to reinforce this trend. Policy changes already underway prior to February 28, 2026, will continue the shift in focus of Saudi policymaking as Vision 2030 moves into its final phase.

Analysts and commentators paid much attention to the Public Investment Fund’s (PIF) new five-year strategy announced on April 15, 2026, for what it portended about the mood of financial realism in Riyadh amid wartime disruptions. However, the strategic reappraisal—to move away from lavish spending on the giga-projects and toward a more targeted portfolio of investments—was first telegraphed by PIF Governor Yasir al-Rumayyan in late October 2025 and had thus been underway for months before the war. To the extent that the rollout of the PIF plan was initially expected in February 2026, it may have been delayed by the war, but the focus on six main areas and three key themes is little changed from al-Rumayyan’s remarks in October 2025. While the new strategy confirmed the pre-February 28 shift in favor of AI, industrial development and mining, logistics, travel, entertainment, and tourism, the war may cause policymakers in Riyadh to focus even more selectively on infrastructure development and new logistics corridors, such as the repurposing of Neom and its port into an industrial hub far from the Strait of Hormuz and the Bab al-Mandab.

Shedding loss-making projects and tying new investments to domestic economic initiatives may better equip Saudi Arabia to navigate an uncertain postwar landscape.

With this in mind, it is clear that a process of rationalization has already taken place as to which projects will be prioritized and how scarce resources will be allocated, and the war’s disruption may bring into sharper relief which initiatives should continue. Expanding resilience to future shocks (as well as to the ongoing disruption, should it continue significantly) is consistent with the retooling of national priorities before the war, albeit with added urgency. The withdrawal of a planned $200 million funding agreement with the Metropolitan Opera House in New York City, and the likely non-renewal of a three-year deal to host the Women’s Tennis Association’s year-end championship in Riyadh, are indicative of the paring down of deals, as is the decision to pull funding from the breakaway LIV Golf tour, which captured global attention. Shedding loss-making projects and tying new investments more directly to domestic economic initiatives may better equip Saudi Arabia to navigate an uncertain postwar landscape.

Conclusion: Resilience without Resolution

Perhaps the larger conundrum for Mohammed bin Salman revolves around the challenge of converting financial leverage into political influence with a hyper-transactional White House. From almost the day that President Donald Trump returned to the Oval Office in January 2025, the Crown Prince has made pledges of Saudi investment in the US economy a central element of the Saudi-US relationship—and the figures climbed incrementally with the president’s May 2025 visit to Riyadh and Mohammed bin Salman’s November 2025 trip to Washington. It is likely a cause of genuine bafflement in Riyadh, as well as in Abu Dhabi and Doha, that a president who saw for himself the opportunities for the United States of a stable, secure, and prosperous Gulf has been so willing to put all that at risk, first in the 12-Day War in June 2025 and more recently, and at a far greater scale, in attacking Iran without any apparent planning for the aftermath. Saudi officials do not yet appear to have considered drawing back from the United States to consolidate investments domestically, but this may be a card that they will retain should the financial stresses of a long standoff with the Islamic Republic grow more acute.

While the Iran war has exposed vulnerabilities across the Gulf, Saudi Arabia has been relatively buffered from the worst of the disruption experienced in states which lack the Hormuz workarounds or the advantage of territorial depth that offers some insulation from Iranian attacks. The rethinking of Vision 2030 implementation and Saudi investment strategies predate the war but are being sharpened by the impact of the conflict in both its kinetic and stalemated phases, as the fragile ceasefire has lasted longer than the military operations but without diplomatic resolution. As officials had already signaled a change of course as the Kingdom gears up for the final push toward 2030, and then for the four years of projects to prepare for the 2034 FIFA Men’s World Cup, the impact of the war is more an acceleration of trends already underway rather than a major change of course.

The views expressed in this publication are the author’s own and do not necessarily reflect the position of Arab Center Washington DC, its staff, or its Board of Directors.

Consistency with Emergent Markets: Key Insights

May 27, 2026

Using a tablet to analyze financial charts for trading insights. Perfect for finance and technology themes. by Jakub Zerdzicki via Pexels

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The role of consistency in emerging markets

Rob Brewis, director and investment manager, Aubrey Capital Management, discusses the challenge of maintaining a consistent approach to EM equities

by Funds Europe

27 May 2026

The role of consistency in emerging markets

Emerging markets (EM) are often characterised as volatile and unpredictable, and to some extent that is fair. There are periods when performance is stellar and others when it is less so.

Over time, however, a consistent approach focused on quality growth companies has tended to deliver attractive outcomes.

The question of whether such an approach works in EM is a reasonable one.

Looking back over the past decade or so, the answer appears to be yes. Returns have been positive relative to the broader MSCI Emerging Markets Index, although not without interruption. Periods such as 2016, 2022 and parts of 2025 remind us that even the most consistent strategies can fall out of favour, often driven by shifts in market leadership rather than any fundamental deterioration in the underlying businesses.

Defining “quality” is less straightforward than it might first appear. Every investor would claim to be looking for good companies. The difficulty lies in being explicit about what that means in practice. One way of framing it is through a simple set of metrics: returns, cash generation and growth. A return on equity of around 15% is a useful starting point. In emerging markets, estimating a precise cost of capital is challenging, so a consistent threshold provides a degree of discipline. It is also a relatively demanding hurdle. From a universe of several thousand companies, only a small proportion consistently achieve that level of return.

Cash generation is equally important. Growth has to be funded, and the distinction between internally generated cash and external financing matters a great deal over time. Companies that rely heavily on borrowing or repeated equity issuance often end up diluting shareholders, whereas those that can reinvest their own cash flows tend to compound more effectively. Earnings growth, in turn, provides the third leg of the framework. In a part of the world where structural growth is higher, mid-teens earnings growth is not unreasonable and allows for a meaningful compounding of value.

These measures are deliberately simple, but they help to narrow the field considerably and focus attention on a relatively small subset of businesses.

There is, however, such a thing as too much of a good thing. Very high returns, while attractive, are rarely sustainable. They tend to attract competition, and over time that competition erodes excess profitability. Varun Beverages provides a good example. The business has been highly successful, particularly following its expansion into southern India and the improvement of previously underperforming assets. Returns rose sharply as a result, but that success inevitably drew attention. New entrants, including Reliance Industries, have since made the market more competitive. It is an excellent business, but the environment has become more challenging, and returns have begun to normalise.

A slightly different example can be found in Eicher Motors, owner of the Royal Enfield brand. Here the strength lies in the brand itself. It is a dominant player in its segment, with a product that is both aspirational and distinctive. Returns have been consistently robust over time, although not immune to cyclical pressures. Regulatory changes and pricing dynamics have at times affected demand, but the underlying franchise has proved resilient.

The importance of cash generation becomes particularly clear when considering the risks of dilution. In parts of the emerging market universe, this has been a persistent issue. China offers a useful illustration.

While economic growth and aggregate corporate earnings have been strong over the past two decades, earnings per share have grown much more slowly. The gap reflects the impact of new listings, capital raising and, in some cases, state-driven dilution. For minority shareholders, this can significantly reduce the benefit of headline growth.

This is not to say that high-quality businesses do not exist in China. On the contrary, there are a number of globally competitive, entrepreneur-led companies. CATL is one such example. Its position in the electric vehicle battery market, combined with strong cash generation, allows it to invest heavily while maintaining a leading competitive position. The balance between reinvestment and return is a powerful one.

Perhaps the clearest example of this dynamic is TSMC. Over a long period, it has combined steady growth with high levels of cash generation and consistently strong returns. It operates in a cyclical industry, but the degree of cyclicality is lower than might be expected, reflecting its dominant position and disciplined approach. Rather than maximising short-term profitability, it has tended to focus on long-term relationships and capacity investment, which in turn has reinforced its competitive advantage.

Even so, there are periods when this type of steady compounding falls out of favour. Over the past year, for example, companies with these characteristics have underperformed the broader market. Some of this can be attributed to regional factors, including a difficult period for India and a more prolonged slowdown in China. Valuation also played a role, particularly where expectations had become elevated.

Such periods are not unusual and tend to be cyclical. What is perhaps more relevant is that, in many cases, valuations have adjusted while underlying fundamentals remain intact. Returns are still strong, cash generation remains robust and balance sheets are generally healthy, often with net cash positions rather than leverage.

The composition of emerging markets themselves has also evolved. Markets such as Korea and Taiwan now exhibit many of the characteristics of developed economies, while China and India remain central to the broader growth story. Beyond these, there is a diverse range of smaller markets, each with its own dynamics and opportunities.

After a prolonged period in which emerging markets were relatively unloved, there are signs that sentiment may be shifting.

Performance has improved more recently, although volatility remains a feature of the asset class. For investors, the key question is less about short-term movements and more about the ability of businesses to compound over time.

In that context, a focus on companies that generate consistent returns, produce cash and grow earnings steadily continues to provide a useful framework. It does not eliminate volatility, but it does offer a way of navigating it, and over time, that has tended to be rewarded.

One day (maybe soon) the Koreans will work out how to “graduate” to DM and that will change the complexion considerably, although Taiwan (also a highly developed country) should graduate but I suspect there are political ramifications to hold this back. Either of these would be a big change to the asset class and if both were to go, it becomes a China and India story again.

Of course, there are natural changes, which can be dramatic, such as the one we are seeing today, when a small handful of stocks, this time technology stocks, become very dominant at the expense of all the others. This tends to happen to the more cyclical stocks, and this can come and go. I remember Samsung being a dominant stock in the past, but not for 20 years or so!

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The Costs of Denial in Economic Growth

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