The dark horses leading the race


 By Tensing Rodrigues*


“Emerging economies have accounted for almost two-thirds of the world’s GDP growth and more than half of new consumption over the past 15 years,” says a September 2018 report of McKinsey Global Institute. But this means nothing more than stating the obvious: the old world is dying. What is of greater interest is to know which among the dark horses are leading the race? And that is what the report seeks to highlight.

The seven countries that are clearly ahead of the rest are China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand. They have had real annual per capita GDP growth in excess of 3.5 per cent for a 50-year period compared to the 1.9 per cent per capita GDP growth of the United States in the same period. But this again is saying the obvious; we already know much about the success of these emerging economies and they are relatively old stories. But there are new stories as well. Eleven countries, other than these have crossed average annual per capita GDP growth of five per cent over the 20 years between 1996 and 2016, which is 3.5 percentage points above the per capita GDP growth of the United States in the same period. The countries are Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan and Vietnam.

Compare that list to the 2001 Goldman Sachs’s BRIC – Brazil, Russia, India, and China, the world’s most promising emerging markets then, together accounting for roughly 20 per cent of global economic growth.  Of these, China surged ahead at a steady pace, while Brazil, India, and Russia lagged behind. According to MGI report, the commodity price slump following the 2008 financial crisis hurt oil exporter Russia and food exporter Brazil badly, while it boosted the growth of China and India by cutting their energy costs. Keeping aside China, which has leapt leagues ahead India is the only one that has maintained a track record for growth, albeit modest. India has the advantage of being less susceptible to global volatility as it is less dependent on exports for its growth.

The MGI study identifies two major factors that seem to have set the winners apart from the losers.  The first are the policy moves by the government, macroeconomic policies that increased savings and ensured economic stability. The government efforts to improve public-sector efficiency boosted investment, and competition policies that enabled the corporate players to grow and thrive. The second is again the policy moves by the government, positive changes in the regulatory framework and business ecosystem have spurred the companies to be ultracompetitive on the global scene, indirectly pushing up the growth rate at home.

Capital accumulation and increase in productivity of labour have played a crucial role in putting the top eighteen emerging economies ahead of the others. The report has proved that an abundance of labour at low wages cannot be a reliable driver of growth; though it does provide a competitive edge in the initial stage, it cannot sustain growth beyond a certain point. The wages tend to soon catch up with the growth, and it is only the quality of labour enhanced by the capital and technology that can maintain the competitive edge in the long run. Innovation plays a big role in the growth process. And competition oriented policies push innovation.

The emerging economies that outperformed others took off when such policies resulted in emergence of large companies that tapped into global demand and hiked the export performance of the economy; they brought productivity benefits by investing in capital, R&D and skill enhancement; and indirectly stimulated the creation, growth, and productivity of SMEs in their supply chains, thus unleashing a multiplier effect.

Future could change the complexion of the emerging economies’ race to the top. Some of the eighteen could slow down; there could be a reshuffling; and new economies could join the table. The MGI study spots a few likely dark horses among the emerging economies. Bangladesh, Bolivia, Philippines, Rwanda and Sri Lanka could be the first to break the glass ceiling. They have clocked an annual per capita growth rate in excess of 3.5 per cent between 2011 and 2016. The next set of new kids on the block could be Kenya, Mozambique, Paraguay, Senegal, and Tanzania. They have moved into the top quartile (top 25 per cent of the countries) of the MGI study but have not yet crossed the lakshman rekha of  3.5 per cent annual per capita growth rate.


* The author is an investment consultant. Readers can send their comments and queries to [email protected]