The Emerging Markets Handbook. Pran Tiku
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Higher savings rate
Most emerging markets have higher savings rates and lower consumption rates – a reversal that is likely to create momentum for growth and cushion financial shocks.
Deeper/broader financial markets
Many emerging markets have expanded financial markets (both for local and private investment) and taken steps to liberalise rules so as to attract foreign capital. Although it will likely take quite some time before most of these emerging markets get to the level of market depth, exposure and disclosure present in more developed markets, the results in the direction of progress are encouraging so far.
Better transparency
In years past many emerging markets were notorious for lack of transparency and absence of proper disclosure. With many of the emerging markets now competing on the world stage there is a definite push towards more transparency and disclosure. In many emerging market countries there are now independent institutions in the mould of the United States’ SEC and Federal Reserve that have a supervisory function and are able to enforce strict rules for both transparency and disclosure.
Reasons to be cautious
1 Political conditions can change quickly. Many emerging market countries are still struggling with political instability.
2 Infrastructure is still grossly inadequate in most emerging market countries, with the exception of China. Many of these counties will require a massive infusion of capital – which is quite scarce in most emerging markets – to rectify this.
3 Corruption continues to be an issue in most emerging markets.
4 Property rights and the rule of law need to be monitored carefully.
5 Hot money can flood into many of these markets only to then exit just as quickly. This leaves long-term investors holding the bag.
Chapter 3: Ten Drivers of Growth in Emerging Markets
There is a healthy debate about what may truly constitute the drivers of growth in any country. For our purposes, the ten drivers outlined in this chapter are used as the framework of the analysis of the short and long-term opportunities and threats in emerging markets. In Part 2 the data for each country is analysed to inform our understanding of that country’s position in each of the ten key areas.
The ten drivers are:
1 Demographics
2 Economic
3 Financial
4 Trade
5 Political stability and governance
6 Business conditions
7 Technology, innovation and infrastructure development
8 Human development
9 Environment
10 Capital markets
1. Demographics
In the simplest terms, demographics are people. Human capital at work is the very lifeblood of emerging nations. When the demographic conditions are right, it can completely transform a nation, resulting in prosperity and well-being for decades to come. Aside from the hard numbers – total population, population growth and average age, to name a few – there are other, less quantitative, factors at play when it comes to demographic advantages. Nations with populations that place a high value on hard work and competitiveness can often overcome what would appear (by the numbers anyway) to be demographic weaknesses. Thus, favourable demographics will never be directly correlated to future growth. It would be unwise and simplistic, for example, to conclude that Nigeria has a brighter economic future than Japan because of its relatively young population.
That said, the fact remains that strong demographics have an extremely high correlation with rising incomes and urbanisation, where low productivity agrarian work is substituted for more productive endeavours in technology and industry.
More so than anywhere else, the sheer power of demographics is on full display in the nations of China and India. A report by consulting firm McKinsey titled ‘Winning the $30 Trillion Decathlon’ points to several mind-blowing figures regarding these two emerging economies. In the first industrial revolution, they note that it took Great Britain approximately 150 years to double their GDP per person. The second industrial revolution, which took place in the United States, required 50 years to double GDP per person. In both cases the two countries started out with a population of around 10 million. The latest revolution in China and India, which started in the late 1980s, took 12 to 16 years to double GDP per person, with a population of close to a billion. The numbers speak for themselves. The latest revolution was a thousand times stronger than the first industrial revolution and it’s just getting started.
In that same report, McKinsey states that in 1990 there were roughly 1 billion people around the world earning more than $10 per day, with the bulk of those people residing within the US, Europe and Japan. Over the last 20 years, however, the progress of urbanisation and market-friendly trade policies, including membership to the World Trade Organization (WTO), has caused that number to double to 2 billion people, with the expansion coming predominantly from emerging markets.
Projections by McKinsey suggest that by 2025 this number will swell to 4.2 billion people, on the back of emerging market growth. The same study projects that consumption will rise to $30 trillion annually (MGI Research), up from 12 trillion in 2010. In 15 years, it is projected that 60% of 1 billion households will earn more than $20,000 per year and most of them will be living in emerging market countries.
Projections like this can seem almost like an abstraction, like they will never come to fruition. But consider the analysts who, several decades ago, predicted that China’s consumer economy would one day trump that of the United States. That is no longer an abstract idea or prediction, it’s already happened. Other statistics that would have seemed absurd a decade ago are now reality. Consider that:
China has already overtaken the United States as the largest consumer market in the world.
Half of the world’s global internet users are in emerging markets.
Brazil’s social networking usage is the second highest in the world.
15 cities in Africa have 60% ownership of internet capable smartphones.
While surprising to many, those who understand the nature of demographics will not be shocked by these current developments, nor developments predicted for the near-term future. Over the next 15 years, for instance, it is estimated by McKinsey that 440 emerging market cities will generate about half of global GDP and 40% of global consumption. During that timeframe, it’s expected that 65 million people – the equivalent of the combined population of London, New York and Tokyo – will move into the cities every year. Again, this is just the beginning.
Demographic factors
When demographics are examined in the upcoming chapters, the focus will be towards:
Growth in population
A large and growing population has several distinct advantages in the emerging market context. It means more workers, increased consumption, increased national savings, a big domestic market, increased economies of scale, and a catalyst for generating new ideas to improve productivity. We view a young and growing population as one of the necessities to sustain economic growth in the long run.
Average age
Emerging markets that are expected to reap demographic dividends have an average age between 25 to 30. When a country has an average age of 30 to 35 the population is considered to be