Emerging economies are often grouped as something of a monolith. But when it comes to economic performance, they vary widely, with only a few countries that realize rapid and relatively consistent growth over long periods. What is their secret?
In the recent evaluation by the McKinsey Global Institute of GDP growth per capita of the 71 emerging economies, 18 emerged. In seven countries – China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand – GDP per capita grew at least 3.5 percent per year during the half century from 1965 to 2016.
The other 11 high performers have less attention because their GDP growth per capita started to accelerate more recently. Nevertheless, Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan and Vietnam all achieved GDP per capita growth of at least 5 percent for 20 years, from 1996 to 2016.
Development economists have long sought the "secret sauce" that enables certain economies to achieve a more stable and robust growth than their counterparts. A look at what these 18 economies have in common offers powerful insights into what that formula could be.
From a policy perspective, all 18 of the economies on our list have pursued a policy of growth that encouraged a virtuous cycle of increasing productivity, income and demand. These agendas include, for example, steps to increase capital accumulation, such as by forcing pension savings; efforts to increase the effectiveness of the government; and measures to encourage more competitive dynamics on the domestic market.
This has enabled the emergence of a generation of large companies that have served as powerful engines of GDP growth. And indeed, the 18 notable emerging economies have twice as many competing, listed companies with annual sales of US $ 500 million or more as other developing countries (adjusted for economy size).
In these countries, the turnover / GDP ratio nearly tripled in just 20 years, from 22 percent in 1995 to 64 percent in 2016 – much higher than the ratio in other emerging economies and near high-income regions. In the same period, the contribution of the added value to GDP also rose sharply, from 11 percent to 27 percent.
Examples of very successful companies in emerging economies are the Chinese giants Alibaba and Tencent. Regional titans such as M-Pesa, a mobile phone-based financial services provider that started in Kenya, has spread across East Africa, and Go-Jek, an Indonesian company that arranges rides and carries out logistical activities, is now expanding to the Philippines , Singapore, Thailand and Vietnam.
In contrast to popular perception, these companies succeed in a hypercompetitive environment, where it is difficult to go to the top, and staying there is even more difficult. Those who do, often become formidable competitors on the international stage. In the 18 high-performing emerging economies, only 45 percent of the companies in the top quintile, in terms of profit generation, were still a decade later in 2011-2015 in 2011-2015. In the same period, in the high-income economies, 62 percent of the incumbents managed to hold their positions.
From 1995 to 2016, large listed companies in the fastest growing emerging economies expanded their net annual results by 2-5 percentage points faster than companies in other emerging economies and with a high income. From 2005 to 2016 they contributed around 40 per cent of the total combined sales and net revenue growth of all major government companies worldwide, although in 2016 they represented only about 25 per cent of total revenue and net profit. More than 120 of these companies have been members of the Fortune Global 500 list since 2000.
The most successful companies in emerging economies, which are mostly focused on exports, not only stimulate growth, but also help stimulate progress in the business environment. In addition, they increase productivity gains by investing in assets, research and development and job training at a higher rate than small and medium-sized companies, although these are also essential elements of the business ecosystems of successful countries.
The question now is whether the well-performing emerging economies can support rapid and consistent growth and whether their colleagues can match their success. Given the changes in the economic environment, the challenge ahead is certainly enormous.
To begin with, there is a phenomenon known as premature de-industrialization, where production growth in developing countries peaks at much lower income levels than in the past. Moreover, economies around the world are being challenged by the rise of automation – a process that will only accelerate. Trade patterns are also shifting.
Nevertheless, the potential of the emerging economies should not be underestimated. If the other 53 emerging economies we viewed matched the productivity growth of their 18 high-performing peers, the world economy would be US $ 11 trillion richer by 2030 – the equivalent of adding another China.
The key to emerging economies will be to seize the opportunities that lie ahead. If China, for example, switches from cheap production to knowledge-intensive production, it will create space for low-income countries, such as Bangladesh and Vietnam, to expand their production sectors, such as in textiles.
The emerging economies have accounted for about two-thirds of the global GDP growth over the past 15 years. That trend will probably continue. As countries implement smart policies, building on the lessons of their most dynamic counterparts, robust and consistent growth can prevail in the emerging world.
Copyright: Project syndicate
– Contact us [email protected]