Analysis: Confusing hard and soft power in emerging markets

Wed Nov 28, 2012 1:55am EST
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By Mike Dolan

LONDON (Reuters) - Deserting debt-laden, recession-racked North Atlantic and Japan for the fast-growing emerging market world may have been irresistible for some investors but many others still remain timid.

Why? It may be a case of "hard power" versus "soft power".

If investment decisions hinged solely on the former - measured by raw data such as economic output, population size and military spending - then convergence between rich and developing nation blocs is nigh on complete.

Adjusted for currencies' purchasing power, emerging economies on aggregate reached a "watershed" in 2012 and became as large as the rich developed world, estimates hedge fund manager Stephen Jen.

That train has long left the station, of course, and may well be only part way through its odyssey. According to Goldman Sachs, the giant economies of Brazil, Russia, India and China alone are expected to surge from a fifth of global output today to a third by 2020.

Using an index of "hard power" traced back to the early 1800s, with inputs such as iron and steel production, energy use, urban population and per capita military spending, Jen reckons dispersion of hard power between the top economies of the United States, Europe, Japan, China and Russia is at its lowest for 200 years.

But he reckons the world is still some way off equality of "soft power" - classed variously as the ability to influence ideas through culture, education, democracy or diplomacy but also capturing "intangibles" such as social justice, good corporate governance, transparency of law or open markets.

There's no direct gauge of this fuzzier "soft power". But if you take gauges such as Transparency International's "corruption perceptions index" as one possible component, then no major emerging economy comes in the top 20 apart from long-standing financial centers such as Singapore and Hong Kong.   Continued...