What Makes Some Emerging Markets Always Win?

a partner at McKinsey Global Institute in Mumbai. Now, Annu is really the perfect person to help steer us through this e M thicket. She's the lead author of a McKinsey report called out Performers, high growth Emerging Economies and the companies that propel them and who thanks for joining us. Happy to be here. Let's start with a basic question for which I rarely get a clear answer. What is an emerging market? I mean, it's tough to say that

Mexico equals Malaysia equals Malawi? How should we be thinking about this question? So you're right, Dan, emerging markets. You know, there are a very large number of economies that are variously called emerging or developing, and they're all actually very different from one another. So we actually have focused on the idea of economies that are growing rapidly. So growth momentum is, you know, the most exciting feature of an

emerging economy for us. So we start by looking back in time and really thinking about emerging markets as those that weren't rich to begin with, and then really asking the question of how fast are these economies narrowing the

gap between themselves and other richer countries. So looking back to the mid eighties, we really look at which countries weren't high income countries basically defined as at the level of about six thousand dollars per capita of GDP at that time, and we have a universe of about seventy significantly large economies that sort of meet that criterion, and then we filter from there a set that have actually sustained very rapid per capita GDP growth over a twenty

to fifty year periods. So going back to the mid sixties or then starting from the early nineties, over twenty to fifty years, some of these countries seemed to become very buzzy for a while, like Poland or Brazil, and then fall on challenging times. What makes for a sustained successful performance. Not many of these have actually stained performance over long periods of time. We found just eighteen countries, of which seven actually did it over fifty years and

another eleven did it over twenty years. So staying turbo charged for long periods of time actually requires you know, two or three essential elements. The most important of these is actually a sort of culture and a set of institutions that inspire and facilitate people to save and companies

to invest. So the whole savings and investment, the productive use of the accumulation of capital, and then the productive use of that capital typically has accounted for sixty or more of growth amongst these eighteen outperformer economies that have sustained growth over long periods of time. And then the other aspect of what it takes to succeed is really institutions that have fostered competition and innovation and therefore growth

in total factor productivity. And that's another roughly of growth. Well, when you start talking about total factor productivity, you're starting to lose me. I'm just a journalist looking only with this list of eighteen, the vast majority of them allocated in Asia. Is there a secret source for that region. The set of countries that we call long term outperformers who have grown over about fifty years are actually all

based in Asia. So here we include countries like China, South Korea, Singapore, and then Malaysia, Indonesia, Thailand and so on. So there is something about a sort of regional factor, the fact that you know, one or two large economies took off and that seems to have created some kinds of kind of ripple effect around the region. But if we look at the more recent set of out performers, which are the twenty growth stories, we do find some

regional diversity there. We do have India and Vietnam, Cambodia, Laos from Asia. But then you also have Central Asian countries like Kazakhstan, Uzbekistan and Penistan which have grown over a period of time on the back of very different drivers. And then you actually have Ethiopia, which is in Africa, of course, so not not really close close to Asia in that sense. I'm so glad I knew that you

mentioned Ethiopia. For those of us who came of age in the nineteen eighties, that seems like a head scratcher. We're used to pictures of famine and live aid rock concerts. What's going on with Ethiopia. I think Ethiopia has um.

While it doesn't have you know, it's not in Asia, so it doesn't have the locational advantage of being near a very large growth country or a growth cluster, but it does have at least one other really important characteristic tick that we see in common across the out performers, and this is a set of very purposeful reforms that have actually opened up the market as well as created

conditions conducive to investment. So Ethiopia came out of a very difficult civil war phase, but then in the eighties really started its first phase of reforms, which was very farming and agriculture oriented. In the early two thousands they actually moved into a much more infrastructure lad wave of reforms and growth, and on the back of that have been investing in a whole set of sectors and industries across logistics, you know, different kinds of manufacturing, including labor

intensive manufacturing and so forth. So, like some of the other recent outperformers, there is work still to be done to sustain and in fact increased growth momentum. It's not that Ethiopia or any of the other countries can declare victory. But it's quite interesting that at least one country in the Sub Saharan Africa region has actually taken off over this period. How important is tried to being an emerging

market star. Trade is an important aspect of or a common sort of aspect right of most if not all of our out performers, simply because I think being connected to the global economy has helped them do two things. One is tap very rapidly into new sources of demand. It's not the only source of demands, so domestic demand has played a big role. Domestic consumption and investment has played a big role in the growth of most out performers.

But trade has given a very very attractive growth opportunity to many companies coming out of the emerging out of the out performers. And then the other thing that global connectedness has done, and I would say more, you know,

even more than trade. It's just being connected with the rest of the world through all kinds of global flows that include um, you know, flows of information data, financial, flows of technology transfers f d I. It's just being connected that is actually also encouraged and enabled more innovation in many of the outperforming economies. So we would think global connectedness is actually quite an important driver in addition

to the capital accumulation we already talked about. Sitting here in New York and looking at headlines about tariffs, a reasonable person might think that it was all over for trade. There is the trendy narrative about deglobalization. What did you discover when you drilled down about the dynamic of world trade patterns? So it's certainly true that the top line or the aggregate global trade as a share of GDP, you know, just that one number has indeed declined ever

since two thousand and eight. But as you say, right, if we drill down, what we do find is that, first of all, it's really a goods trade that has taken most of the hit UH and and most of that, if not all of it, is really the value of commodities within goods trade, so manufactured goods, particularly labor intensive ones, you know, exports or trade, and these is still growing. Services trade is still growing as a share of GDP.

The second important aspect is that the corridors of trade are really shifting, and this is quite a profound shift. So if we look at what we call broadly South South trade, which is trade amongst between emerging economies as opposed to emerging versus rich economies. So South South trade has actually grown as a share of you know, global trade and goods from something like eight percent to above over the last fifteen years or so, and that's actually

quite dramatic. It's grown at you know, two to two to three times the volume of all the other corridors of trade that you can imagine what role does China playing all this is China now important stuff that it used to make. There are many interesting ways actually in which China is reshaping not just it's trade or it's trade with the US, but you know, some of these

obal trade corridors and opportunities. One one trend that we see is that China is focusing more and more on manufacturing and export of more knowledge intensive or R and D intensive goods, particularly in the high tech electronics computers, those kinds of spaces, and in a way receding or seeding space in the lower value added types of manufacturing like textiles and leather and so on. And some of that export volume is actually moving moving to lower labor

cost countries like Vietnam and Bangladesh. So that's one shift. The other important shift is that we think that China is an engine of global consumption is also growing very rapidly. Emerging markets overall will drive something like sixt of global consumption out to thirty so they are collectively important as

drivers of global consumption. But China's role then that is particularly large and important, and there will be parts of that consumption that are actually going to be sourced from other lower labor cost markets as well, because domestic consumption of manufactured goods in China will pretty much continuously increase for the next twenty years. People often talk about favorable

demographics in emerging markets. By that they usually mean young populations or populations that are younger than in the developed world. Can you drill down a bit for us, are some of these societies starting to age and does that matter? I think the demographics of emerging markets very quite a bit. Going back to your opening question about you know, how can you speak about them in the same breath, and

that's equally true of the aging profile. So you do have in our universe the countries in the northern and eastern part of Asia the Central Asian countries, these definitely, uh you know, are going to see and are fairly rapidly going to see aging, whereas you have South Asia and then you have Africa where this is not going

to be the case. Right, But as you step back and think about the drivers of growth, we did actually find that you know, growth in labor supply was was was a very very small part of the total growth that that took place in the out performance. So growth in productivity per worker is actually much more important. And therefore, even as economies age, there are very important drivers of

productivity that still represent opportunities for unlock. In other words, you have economies that are not completely urbanized, and we know that urbanization actually lifts productivity by two to three times compared to you know, living in rural areas. You have economies where you know, financial access and financial inclusion is not complete, and this is true even in regions like Latin America, and we know that encouraging savings and

investment actually does drive up productivity. Many emerging markets have big conglomerates that are either state owned or privatized to government friendly groups. Is the way that these corporations have a benefit for emerging markets or is it a hassle? We think that the outperformer economy is actually many of them for for whom you know, we have the data

and can study this feature. But we do find that one really striking feature of these economies is the role that companies of of a significant size have played in driving their growth. Now, are these state owned or are they private is but with substantial state or quasi state interests.

Our data set essentially covered companies that are publicly listed, so whether they have a majority you know, state shareholding or or a private shareholding, as long as they're publicly listed and in some ways unswerable or their data as transparent, that's the universe we looked at. But looking at such companies, we find that the outperformers actually had twice the number of large companies as other emerging economies did. That these

had actually grown much faster. So they had grown from revenue to GDP of something like you know, in the mid twenty percent region to the mid sixty percent region, which is extremely rapid growth just in terms of sheer, scale and scope, and there is there is reason to believe that these companies are competitive in the US, we wrestle with the role that automation and robots will play

as technology advances and as our workforce ages. When does this become a problem for emerging markets and are they equipped to deal with it? Automation and technology are fundamentally very powerful opportunities to drive productivity in emerging economies, and then because they do change the nature of work, they also result in a new set of work opportunities or a new type of job. Unemployment impact right now. Now, how exactly this plays out depends to some extent on

the economic cost and benefit of deploying technology. So if you think about a labor cost as a proxy for that, we find that there are i think a large number of low labor cost emerging trees, typically those where per capita GDP is less than five thousand dollars or so, where even over the next you know, ten to fifteen years, these countries would in our opinion, have the potential to raise both employment as well as GDP from manufacturing activities.

So the deployment of technology would allow them to raise value add and productivity in manufacturing but also employment. Not all countries fall into this bucket, So there are you know, the higher, higher income emerging economies where this would not be the case and where the questions around you know,

how can you actually create productive jobs in services? How can you actually reskill and redeploy people from what they're doing to the new and emerging areas within services sectors is going to be actually one of the central challenges as well as opportunities for emerging economies as as you think about inclusive growth. Aw thank you for walking us through the world of emerging markets. It's a pleasure. Thank you.

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