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The Emerging Markets Paradox

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The Emerging Markets Paradox

This missive by Canadian writer Laurence J. Peter highlights the potential for frustration when seeking to reconcile conventional economic theory with human behavior. Take trust, for example. Economic theory would suggest that people will trust institutions that successfully deliver on their purpose – and withhold that trust from those that fail to do so. A logical conclusion might be that trust levels in wealthy, developed markets would be high, based on their long track record of delivering jobs, stability and economic growth (and limiting corruption). Emerging markets, with a history of delivering less of everything but the corruption, should exhibit lower levels of trust in key institutions.

Wrong!

And yet, year after year, the results of the Edelman Trust Barometer contradict this conventional wisdom. It seems to be an enduring feature of our current reality that trust levels are generally higher in emerging markets, and lower (and declining) in developed ones.

This year again, the top five nations on our Trust Index are dominated by emerging markets: India (80 percent), China (79), Indonesia (78), the UAE (77) and Singapore (71). This relates to the informed public, which roughly corresponds to societal elites. The countries with the most trusting mass populations are the same, though slightly reordered with India at 70 percent, followed by Indonesia (67), China (62), Singapore (59) and the UAE (59). Bringing up the rear among informed publics, we have Poland at 43 percent, followed by Ireland (44), Russia (45), Sweden (47), Japan and South Africa (both at 49). For the mass population, it is: Russia (31 percent), Poland (34), Japan (34), Ireland (35), Sweden and South Korea (both at 36). Once again, this establishes developed markets as the bigger mis-trusters. For reference, the global Trust Index stands at 60 percent for the informed public, and 45 for the mass population.

Wrong again!

Economic theory further postulates that emerging markets should exhibit societal inequality both more acute and more entrenched than developed markets, reflecting a much larger gap between the haves and the have-nots. Political theory tells us this gap will cause societal discord. And history seems to support these assumptions.

Yet again, the gap between the informed public and the mass population in our survey indicates the contrary. Eight of the top 10 countries with the largest trust gap are developed markets, with the US (boasting a 21-point differential), the UK (19) and France (18) leading the way. Seven of the 10 markets with the lowest trust gap are emerging, with Brazil (4 points), Colombia (5) and Argentina (6) showing the smallest discrepancy in viewpoint between mass and the informed public.

And the trend is skewing even further in this direction. Over the past three years, the top five increases in the trust gap are in Canada (with an increase of 13 points), Japan (12), the US (11), Hong Kong (11) and the UK (10). In other words, these are the five countries surveyed where trust levels between the informed public and mass population have diverged the most. It is worth noting that Hong Kong began with no gap at all in 2015, so their 2017 gap of 11 points is still relatively low.

The countries with the lowest “gap growth” since 2015? Brazil (with a gap reduction of 7 points), followed by India (-3), the UAE (-2), Indonesia (-2) and the Netherlands (-2). Both the 2017 scores and the three-year trend suggest that differences between the informed public and the mass population are static or declining in emerging markets even as they grow in the developed Western world.

Trust and Populism

This continuing dichotomy between emerging and developed markets, between expectation and reality, suggests the application of a different standard of trust in each. It seems that both the informed public and mass population in different markets have different expectations of their institutions. In developed markets, the provision of societal stability and basic economic benefits no longer seems sufficient to generate trust. This has become table stakes. Instead, expectations have risen to the realm of specific issues of personal importance – immigration, racial and national identity — in Europe’s Brexit referendum and the American presidential election, for example. This has opened the door for populist leaders who can appeal to those specific interests. Ironically, such populism has long been considered the hallmark of leaders in emerging markets, where it has often been applied as a means of distracting attention from the lack of basic economic opportunity.

India’s transition to a populist leader has made it the most trusting country in our survey, with a relatively low (and declining) trust gap between the informed public and the mass population. To date, this is less a reflection of Prime Minister Modi’s success in addressing key societal issues than his ability to appeal to broad swaths of the population and to generate hope for future improvement.

The UAE and China are also among the most trusting nations in our Index. They are trust gap anomalies, however, scoring the third (tied with France at 18 points) and fifth (17) largest gaps in our survey respectively. It seems that the inability to influence leaders directly is a trust reducer, at least among mass populations, who likely benefit less than the informed public in countries with non-democratic forms of government.

The United States, on the other hand, exhibits the biggest trust gap in our survey. This gap confirms one or our key findings from a year ago, which we have dubbed the “inversion of influence.” While in many cases, authority remains with the elites, influence has increasingly migrated to the mass population. When asked about the credibility of corporate spokespeople, for example, CEOs scored an all-time global low of 37 percent (dropping 12 points from a year ago), and government officials brought up the rear with only 29 percent (down 6 points). Employees ranked much higher at 48 percent, and “a person like yourself” topped the list (tied with technical and academic experts) with 60 percent. It is likely that this influence shift contributed directly to the election of populist Donald Trump. It remains to be seen whether President Trump will reverse the widening trust gap. Early signs are not encouraging.

Conventional Western political and economic theory have long positioned the path of societal evolution as culminating in capitalist democracy as it exists in developed Western nations today. Recent events in the United States and Europe – supported by the results of our Trust Barometer – could make one wonder exactly who is evolving towards whom.

Robert Holdheim is CEO, Edelman South Asia, Middle East & Africa.

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