THINK YOU NEED AN EMERGING MARKETS STRATEGY?

THINK AGAIN

 (part 2 out of 3)

by Dinesh Khanna, Alexander Roos, Enrique Rueda-Sabater, David C. Michael, and Janika Gauselmann

A Dramatically Altered Global Landscape

Has the global economy really changed that much over the past decade or two? The answer is yes. And the evidence can be found by examining three trends: the fading role of affluent countries, the paradox of economic might among less-
than-affluent countries, and the diversity in growth across the global economic landscape.

Affluent countries no longer exclusively dominate the global economy. Countries such as the U.S., Germany, and Japan continue to be economic powerhouses, but when we look at either economic size (measured by nominal GDP) or shares of global GDP growth, we can see that the role of affluent nations is clearly diminished. In 1995, the U.S., Japan, and Germany were the top three economies as measured by GDP. By 2015, China had rocketed to the number-two spot, and India—not even on the list in 1995—was ranked seventh. (See Exhibit 1)

Dividing countries into three income bands to dig deeper into relative GDP performance illustrates the scope of change. Our sorting is based on two thresholds. The lower threshold is $10,000 in annual GDP per capita (which roughly equates to average monthly incomes of less than $400 in nominal terms). Most countries with annual GDP per capita that is less than $10,000 have only small segments of the population with the means to purchase high-ticket items—especially durable goods—making that a relevant low threshold for the purposes of exploring market dynamics.

The higher threshold is $30,000 in annual GDP per capita. (For most of these countries, purchasing-power-parity and nominal terms produce similar numbers, so this corresponds to average monthly incomes greater than $2,500.) In countries whose income level is more than $30,000, most households have significant disposable income, creating demand for a wide range of products and services. Countries in the middle—from $10,000 to $30,000 annual GDP per capita—generally include many households that are moving from basic to more extensive consumption patterns.

Each of the resulting three income bands includes roughly the same number of countries. We call the countries whose annual GDP per capita is less than $10,000 incipient. We label those countries whose annual GDP per capita ranges from $10,000 to $30,000 midfield. Finally, affluent countries are those whose annual GDP per capita levels are greater than $30,000. Our analysis covers 152 countries, excluding only very small countries and countries in turmoil (where data is not available). Data is for 2013, the most recent year for which a complete set is available.

A 2013 snapshot of the countries within the three bands, by current share of GDP, still shows the economic predominance of affluent countries, but the picture differs greatly from that of a decade earlier. This is because nearly half of all the growth in the world economy from 2004 through 2013 was generated by midfield countries. The cumulative effect of the strength of the midfield countries is very significant: those economies nearly doubled their share of global GDP from 17 percent in 2004 to 31 percent in 2013. (See Exhibit 2)

A new paradox is emerging. At the same time, the metrics for individual countries reveal another fundamental shift. At the end of the twentieth century, the leading global economic powers still were, for the most part, high-income countries. Today, however, several countries that are not wealthy in terms of per capita income are economic powerhouses. China’s economy, for example, is about 60 percent the size of that of the U.S., but Chinese per capita income is less than one-quarter that of the U.S. The economy of India, meanwhile, is nearly half the size of Japan’s, but Indian per capita income is only one-seventh that of Japan.

The combination of economic might and lower income levels in these countries results in demand dynamics that are quite different from those seen in higher-income nations. And this fact has major implications for many markets and for any company operating or aiming to expand globally.

Growth rates across the global economic landscape are increasingly diverse. Two popular notions over the past two decades were the idea of decoupling, meaning that low-income-country growth patterns were not tied to those of high-income countries, and the concept of a two-speed world in which the growth trajectories of developed and emerging economies diverged. These views, which stemmed in large part from the rapid growth of China, India, and other lower-income countries over the past two decades, helped drive global strategies for multinationals and cement the notion that an emerging-market strategy was needed.

But such patterns no longer hold true. Virtually all affluent and midfield countries, for example, were significantly affected by the global crisis that began in 2008, with only incipient economies emerging relatively unscathed. That fact undermines the notion of decoupling.

Even more important, within each of the income groups, there was significant diversity in terms of both recovery from the crisis and performance subsequent to the crisis—a finding that flies in the face of the two-speed economy notion. So while some formerly fast-growth economies (Brazil and Russia in particular) have experienced a steep falloff in growth, some incipient and midfield countries boast robust expansion that has been underappreciated. And in the developed world, some major economies have recovered well from the global recession while others have seen a less-than-impressive bounce back. For instance, Japan and Italy in 2013 had not yet achieved the nominal GDP that they had in 2007, while the GDPs of the U.S. and the UK in 2013 were both one-sixth higher than in 2007.

Analysis of GDP growth rates for our set of 152 countries shows how outdated the two-speed economy view is. Using International Monetary Fund estimated and projected data for GDP in 2014 through 2016, we have calculated the current GDP growth-rate momentum of individual countries. For affluent countries, we consider 2.5 percent annually (the median growth rate for the group) as the threshold for “fast” growth. To take into account that lower-income countries require stronger GDP growth rates to close the gap with high-income countries over time, we chose thresholds of 3.0 percent and 3.5 percent, respectively, for midfield and incipient countries. These growth rates allow for affluent economies’ doubling GDP (in real terms) in 30 years, while midfield and incipient economies would double GDP in 25 and 20 years, respectively.

Comparisons of growth rates for countries in our three income bands ten years ago with estimated growth rates today reveal that there is no longer a systematic relationship between income levels and growth rates. (See Exhibits 3 and 4.) Instead, today, there is roughly an even split between fast- and slow-growth economies in both the midfield and affluent country groups.

A review of the growth trajectories of G20 countries reveals just how much the landscape has shifted. Only a few years ago, the affluent members of the G20 were all growing slowly, and the midfield and incipient members were all growing faster. Today, the picture is mixed: more than half of G20 members lack growth momentum. This, as the following shows, is not related to the income group to which those countries belong.

• Five are fast-growth affluent countries: Australia, South Korea, Saudi Arabia, the UK, and the U.S.

• Six are slow-growth affluent countries: Canada, France, Germany, Italy, Japan, and Spain.

• Three are fast-growth midfield countries: China, Indonesia, and Turkey.

• Five are slow-growth midfield countries: Argentina, Brazil, Mexico, Russia, and South Africa.

• One is a fast-growth incipient country: India.

This analysis highlights another important development: the obsolescence of the BRIC label. Since the label was coined, China’s growth has significantly outpaced the growth of the other three. Although India’s growth has picked up more recently, China’s economy now represents nearly three-quarters of the aggregate of the BRIC economies. The BRIC countries never had much in common, and their trajectories are increasingly divergent. In addition, China is now such an outsize part of the group that looking at these four economies together no longer makes sense. Ironically, the group appears to have gelled as a political force just as the four countries were becoming less meaningful as an economic cluster.

Fuente: bcg. perspectives
 

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.·. Miguel Ángel MEDINA CASABELLA, MSM, MBA, SMHS .·.
The George Washington University's Representative at LatAm Forums & Fairs since 2001
The George Washington University Medical Center's Representative for LatAm Countries since 1996
Former Academic Director and Change Management Professor, HSML Program for LatAm, GWU School of Medicine & Health Sciences (Washington DC)
CEO, MANAGEMENT SOLUTIONS GROUP LatAm
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