Even though the government and the private sector have different roles in society, I believe both must depend on a capitalist philosophy in order to be successful. When capital is raised, be it from taxes or from the savings of individuals for investment, it must be put to productive use. Simply put, the capital must result in higher productivity, that is, there should be more goods and services produced for less capital. This translates to higher profitability. However, government organizations are often found to be less efficient in making that transformation because there are few incentives to do so. In comparison, the private sector is mostly driven by profit motives and incentives.
I believe having a motivating factor is fundamental for success and can garner remarkable results. In order to create motivation, government organizations could implement incentives for good performance. This could result in generating higher productivity among government workers, and in turn, they may be able to put capital, in the form of taxes, to better use. We have already seen some governments around the world privatize firms, implementing profit incentives within those organizations, often with stellar results.
We just had our semi-annual analyst conference in Romania last month, and given our proximity to Russia, the giant in Eastern Europe, that was naturally a topic for discussion. Here, Gennady Zhilyaev, our Russia-based investment analyst, shares some of his personal insights on the country.
By Gennady Zhilyaev, Deputy Director, Templeton Emerging Markets Group
Russia is the world’s biggest exporter of natural gas and the second-biggest exporter of oil. It is also the third-largest exporter of steel and primary aluminum. However, it was one of the hardest-hit countries during the recent global economic crisis, largely due to its huge dependence on commodity prices. Oil prices plummeted and rating agencies lowered their credit ratings on several Russian banks, while the country’s GDP shrunk by 7.9% in 2009 and stock prices plunged significantly from their peak. The government had to recapitalize the banking system and bail out several large state companies, thus putting further pressure on its own finances.
Many companies are still reeling from the aftermath. Some media reports indicated that the number of Russian companies that filed for bankruptcy rose by 15% in 2009, but I believe that correlates with the recent economic downturn, and it follows a global trend. During the thriving years of economic growth, we saw many start-up companies emerge, flourishing in a very favorable environment. However, tested in challenging times, some companies’ business models turned out not to be viable and failed to see them through.
Privatization of state-owned enterprises has been a key catalyst in unlocking the market potential of emerging economies. Personally, I believe that listing on stock exchanges or allowing market forces to work can ensure greater efficiency in effective resources deployment.
In recent years, we have seen a rise in initial public offerings (IPOs) in emerging markets (EM) as EM companies begin to recognize the advantages of going to the market to raise capital in order to expand and grow. At the end of 2009, emerging markets IPOs represented about 70% of all global IPOs, as compared to about 20% in 2000. During 2009, the amount of IPO money raised in emerging markets rose steadily. Total funds raised were about US$87 billion. 
The flood of emerging markets IPOs was also largely fuelled by excess liquidity in the global markets. There has been a dramatic increase in the money supply in the U.S., China and other countries. As a result of the current low interest rate environment and less attractive growth prospects in developed countries, investors look to emerging markets to seek better yields for their cash.
Although the large amount of IPOs in the market is a reflection of emerging markets’ strength, this huge pipeline may also put downward pressure on the markets as money could be diverted to new issuances, away from existing shares in the market.