Tigers With No Claws; Emerging markets in Asia are struggling to regain the momentum of the 1980s and 1990s.(Cover Story)

Byline: Ruchir Sharma (Sharma is co-head of global emerging markets at Morgan Stanley Investment Management.)

Every bull market has its stars. During the previous boom in emerging markets that ended a decade ago, the superstars were the tigers of Southeast Asia. At that time, the economies of Thailand, Indonesia and Malaysia were growing at an average of 8 percent and were the largest components of emerging-market equity benchmarks. In development-economics classrooms, these countries were called paragons; their high savings rates, industrious work forces and competent management of macroeconomic policy were cited as the signposts of Asia's new dynamism and savvy. In contrast, Eastern Europe was marked by economic chaos, and Latin American economies symbolized decadence.

Today, we're well into another bull run in global equities, one that began in March 2003. Investors increasingly buy into the thesis that forces of "economic catch-up" have been unleashed by globalization--and as a result, interest in developing markets has never been higher. Emerging markets in aggregate have gained more than 150 percent since the run-up began. But this time most markets in emerging Asia have lagged considerably, with those in Taiwan and Malaysia, for instance, rising by less than a third of the average increase in the emerging-markets equity benchmark. Leading the pack: Eastern Europe, the Middle East and Latin American markets, with countries from Russia to Romania registering robust growth rates that were once commonplace in East Asia.

To be sure, equity-market performance and economic-growth profiles can at times be distant cousins. In the mid-1990s, when East Asia's rate of economic expansion dazzled the world, some of the region's markets generated pedestrian equity returns. But those were the days when corporate governance standards in emerging markets were poor, and management incentives at companies often weren't aligned with shareholder interests. The corporate culture today is much improved, and equity markets are more reflective of economic reality. The message from the marketplace, then, is that apart from China and India, emerging Asian economies are struggling to regain the momentum of the 1980s and 1990s at a time when the rest of the developing world has never had it so good.

Just before the 1997-98 Asian crisis, Thailand, with a population of 60 million people, topped the global consumption tables for Mercedes-Benz cars, Volvo trucks and Johnnie Walker Scotch whisky. Today, Bangkok hardly features in the plans of ...