Among Emerging Markets, Interdependence Grows

The world's often fragile network of emerging economies is perhaps more interconnected than ever, according to a recent study by the British company Ashmore Investment Management. The study's main finding is that investors in emerging markets countries are beefing up their positions in other emerging markets, even as they keep their asset flows into the developed world fairly steady.

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The study looks at cross-border investments, which are investments in foreign governments and companies (for example, if someone from India buys shares of a mutual fund that invests in U.S. companies). Ashmore's numbers show that in 2001, investors in emerging markets countries put about 5 percent of their cross-border investments into securities housed in other emerging markets. By the end of 2008, that number had grown to about 25 percent. The remaining 75 percent went to developed markets.

For their part, investors in developed countries have kept their stakes in emerging markets relatively unchanged: In both 2001 and 2008, roughly 5 percent of their cross-border investments were in emerging markets.

The study, done by Ashmore's Ousmène Mandeng, excludes central banks' investments. As a result, it primarily captures the behavior of private investors, such as individuals and companies, as opposed to governments. For the purposes of the study, all countries except for the United States, Canada, Japan, Australia, New Zealand, and the 12 original European Union members are considered to be emerging markets.

Broadly speaking, Mandeng's findings point to a growing interdependence among the world's emerging economies, many of which are looking for stability after years of boom and bust. The study also indicates that investors in emerging markets are buying into the idea that "economic power is being transferred increasingly from advanced economies to emerging markets," says Mandeng.

While emerging markets investors are generally enthusiastic about other parts of the developing world, Mandeng found a fairly wide range. Thai investors, for example, stashed 55.7 percent of their cross-border investments in other emerging markets in 2008. For Colombians, that number was just 0.3 percent.

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