Beyond the near-term triggers, there are some long-term economic and political developments that may be quietly laying the foundation for a sustained period of better performance from these countries. These would include the world’s increased recognition of the strategic importance of developing nations, new models for economic development that stress free markets and individual initiative, and evidence that nations that followed now-discredited approaches to development (such as the old Asian economic model) are already striking out on new paths.

In the aftermath of the September 11 terrorist attacks on the United States, there is a heightened awareness of the importance of key emerging markets in global security. Recently, the U.S. has stepped up economic assistance to supporters in the war against terrorism, including Pakistan, Egypt and Turkey. It seems likely that a greater degree of political partnership with these nations could well translate into greater investor attention, stronger capital flows and positive market performance.

It is also likely that there will be broader support for emerging markets globally, as their pivotal role in the new world order emerges. Potential political and economic instability in the emerging markets could create havoc for the world economy. The recognition that lack of economic opportunity provides a fertile breeding ground for terrorism are expected to solidify global support for measures aimed at reducing instability in the world’s developing regions. Greater stability would have a positive effect on emerging markets, reducing the risk premium and boosting equity values. Even a focus on just the largest markets would likely boost the overall asset class, as «big ten» alone accounts for over 60% of total emerging markets capitalization (based on the MSCI Emerging Markets Free index).

Another stimulus to the long-term economic performance of emerging markets is greater recognition of free, open, transparent markets in promoting economic growth. Despite the noisy protests of «anti-globalization» groups at recent multinational meetings, there is a growing consensus that economic development promotes personal freedom. Greater acceptance of the linkage between economic development, free markets and individual freedom is likely to increase over time, stimulating growth in emerging capital markets.

Leading economists with influence on emerging markets policymakers have been arguing that free markets solve problems most effectively. They show the importance of three key characteristics for growing economies – openness, macro stability and small government. Wider acceptance of these views can be expected to promote long-term, stable growth.

Evidence that this is already occurring can be seen in Asia. Asian companies and policymakers demonstrate a clear movement away from the old economic model that prevailed prior to the 1997-98 financial crisis towards a more open, market-driven system. The old model was one in which the consumer saved actively, banks lent carelessly, and borrowing corporations over-invested with poor returns. While creating the illusion of steady growth, this model was in fact unsustainable.

While the degree of progress towards a new Asian economic model varies from country to country, our observations confirm a general shift towards a framework where consumers spend more and borrow more. Lending institutions in turn have tighter lending standards, putting corporations into competition for capital and necessitating higher returns on investment. This new paradigm offers the prospect of more sustainable growth and higher valuations for investors.