EMERGING MARKETS
Will developing nations save the global economy?
It could be a $ 30- trillion US market. And it’s bigger than the Industrial Revolution. “It” is the growth in emerging markets, countries that are not yet as developed as the United States or Canada, but that are experiencing high levels of growth that have them demanding more goods from within their own borders and from abroad. And it’s not just Brazil, Russia, India and China, the so- called BRIC countries. Depending on the source, there are about 25 emerging economies, including Chile, Turkey, Indonesia, Mexico and Peru, to name a few.
Global management consulting firm McKinsey & Company estimates consumption in emerging markets will account for $ 30 trillion US by 2025, up from $ 12 trillion US in 2010 and bringing it almost on par with consumption in the developed world.
A report by McKinsey’s business and economics research arm, McKinsey Global Institute, calls it “the biggest growth opportunity in the history of capitalism.”
“We think it’s bigger than when the plow was introduced,” report co- author and MGI director Richard Dobbs said. “And this is a thousand times the size of what happened with the British Industrial Revolution.”
Economies evolve as they move out of agriculture into manufacturing. As that happens, productivity and income increase, Dobbs said.
That’s what happened during the Industrial Revolution and now it’s happening in the emerging markets, led by fastgrowing China.
But while the United Kingdom had 10 million people affected by its revolution, there are 100 times that many in China. And changes are happening much faster because unlike the Industrial Revolution, which progressed at the rate of technological advancement, the technology needed to make these economic gains already exists.
So while it took 150 years for the U. K. to double its gross domestic product, adjusting for inflation, China is doing it in 10 or 15 years, Dobbs said.
“So it’s 10 times the economic acceleration, 100 times the mass and if you multiply mass and acceleration you get force. So it’s 1,000 times the economic force,” he said.
With the developed world slowing down — and the eurozone and United States economies ailing — “we’re sitting in a world where a lot of the growth — and depending on different measures of it, you could say that 70 per cent of global growth — is going to be happening in emerging markets,” Dobbs said.
There is no set definition of what is and what is not an emerging market ( see story below). So McKinsey, like most economists and analysts, includes all countries that are not yet developed in its growth forecasts. But there is no dispute that it is the fast- growing developing countries that will be leading the charge.
For example, between 2000 and 2010, China’s growth averaged more than 10 per cent a year and India’s topped seven per cent. During that same time period, the United States, traditionally a leader among developed countries in growth, grew at less than two per cent.
And China and India weren’t alone. Russia, Indonesia and Turkey all had average growth rates during the decade of more than four per cent.
Since the recession of 200809, emerging economies have accounted for roughly twothirds of global economic growth and one- half of the growth in global imports, Bank of Canada Governor Mark Carney said in a speech to the Greater Kitchener Waterloo Chamber of Commerce in April.
“China and India are housing the equivalent of the entire population of Canada every 18 months,” notes from Carney’s speech said.
“In parallel, a massive new middle class is being formed, growing by 70 million people each year and representing a fast- rising share of global demand for all types of goods.”
It’s that growth that makes the emerging economies so important.
“There’s nothing deep here,” said James Brander, AsiaPacific professor of international business and public policy at the University of B. C.’ s Sauder School of Business.
“These economies, because they are emerging and because they are growing rapidly, are becoming an important part of the world scene.
“China’s now the world’s second- largest economy and probably in my lifetime — and I’m not very young — China will become the world’s largest economy,” Brander said. “So it’s just getting to be pretty darn important.”
India is not as far along as China but it is also becoming important, he said. So, too, is Indonesia, with more than 100 million people and Brazil, which has a population of close to 200 million.
“And if we look at Canada’s exports, and especially B. C.’ s exports, 20 years ago the economies we now call emerging economies weren’t even a footnote,” Brander said.
But why are some countries growing and others aren’t?
You need to look at specific economies to determine what’s behind their growth, said Stuart Bergman, assistant chief economist with Export Development Canada.
“But in general, these are countries that have large populations — typically young populations — that are emerging into middle class,” Bergman said. “They want new things. As you emerge to middle class, you tend to move to higher protein diets, you want cars and TVs and just stuff.
“And that fuels growth and also fuels opportunities for foreign companies,” he said.
“Brazil, China, Indonesia, Mexico, India and Russia — those six countries are roughly half of the world’s population,” Bergman added.
“Clearly the capacity here is enormous.”
By contrast, developed economies have several demographic constraints including populations aging and demanding less, he said. Developed economies also have a massive amount of debt to pay off.
“So [ there is] not a lot of purchasing happening,” Bergman said.
UBC’s Brander believes the move by many countries to a more market- based economy is what is driving their growth.
Despite being communist, China has a market- based economy functioning at about the same level as Canada’s, Brander said.
“Their transition from centralplanning — the old communist model — to a market- based economy has had a huge impact in China,” he said.
Other emerging countries are moving away from political instability and corruption that has held them back economically. Take the Philippines, for example.
“It wasn’t that long ago that it was a mess, with a dictator, [ Ferdinand] Marcos, [ and] the economy run by Marcos’s friends and most people living in subsistence agriculture,” Brander said.
“They still have problems in the Philippines but they’ve made a lot of progress in a single generation.”
Other growing countries have followed a similar pattern.
“So [ countries] have achieved rapid growth largely through improved institutions, improved political stability and technology transfers, so basically adopting the modern market- based economy structure,” he said.
Countries in Africa and much of the Arab world, on the other hand, still have corrupt governments, civil wars and a few people with lots of money who control the system, Brander said.
“As China has demonstrated, you don’t necessarily need democracy. But what you do need is a rule of law and a reasonable level of honesty.”
But while emerging markets are the place to look for growth, those countries alone can’t pull the global economy into recovery, economist Bergman added.
Emerging markets lack the depth to drive global growth on their own, he said, because while a lot of trade happens among emerging markets, the ultimate consumer is often in the developed world.
“Fully a quarter of [ China’s] economy depends on the advanced industrialized world for growth because of either direct exports — their biggest export market is Europe — or indirectly,” Bergman said.
Consequently, if the developed economies have negative growth, the emerging economies won’t be able to completely offset that.
“It’s not to say they won’t be able to at some point but right now the emerging markets, because of globalization, can’t drive global growth on their own.”