Emerging markets 1: Risk aversion

(written in 2011)

I am now working in Delhi and usually take local rickshaws, or autos as they call them here, to commute to work. I was once going in one of them back home and was quite afraid as the driver was navigating it on Delhi's congested roads really fast. But I am getting used to it slowly. Having spent some time Mexico and the Middle East earlier this year, September in East Africa and now two weeks in India I came to realise that people in the emerging economies have in general lower levels of risk aversion compared to the western world.

Driving habits in all these counties are horrific for a westerner. Lanes are generally not respected and nor are the speeding limits, drink driving is a norm and you overtake whenever there is at least a slight chance of making it back to your lane without crashing into a car going in the opposite direction.

The same goes for utilisation of space or usable lifetime of things. More people fit into a single bus and more goods are loaded onto a single truck. A van that would have been deemed unusable in the West is still carrying passengers and old wooden scaffoldings can be seen at most construction sites. This drives down capital expenditure and operational costs but in turn it increases the risk of running those processes.

Lower levels of risk aversion are reflected also in living habits. People in Mexico or East Africa live in neighbourhoods where it is not safe to carry your watch during a day and where walking after dawn is almost equal to being in trouble. Some townships in Israel have concrete shields built every 200 meters on a street so that when sirens signal rockets being launched from Gaza people can seek shelter instantaneously regardless on where they are.

But why do people behave in such way? My colleague and friend from Kenya gave me a very simple answer. Because they have to, they have no other choice. If my auto driver was taking too much time to take me from A to B, he would miss out on monies he could have earned by another passenger somewhere else in the meantime. Companies have to innovate in a disruptive way because people would not be able to afford products at their usual costs.

But while the external environment is forcing my driver to be taking risks, I am telling him as a customer to be more careful. Western firms are under pressure to start making bolder moves and companies from emerging markets are learning very well that safety cannot be compromised. It will be interesting to see who learns faster and whether higher aversion to risk is actually an advantage or an disadvantage.