5 Drivers of Emerging Market Growth

As emerging markets increasingly become masters of their own fate, new engines of growth emerge.

September 06, 2017

For emerging markets (EMs), the simple certainties of the post-1980s era of market reform, trade liberalization, and export-led growth have waned. As aging populations in developed markets reduce aggregate demand potential, and anti-globalization sentiment increases, gone is the rising developed market tide to lift all EM boats. Increasingly, EMs are masters of their own fate, with their internal ability to tackle domestic opportunities and risks determining their divergent growth paths.

 

The long-term economic promise of emerging markets

Despite these disparate growth paths, EMs will collectively be the primary driver of global growth over the next decade. EMs already represent nearly 60 percent of global gross domestic product (GDP) on a purchasing power parity basis. They are significantly more resilient: From 2007 to 2011 nearly 50 percent of developed markets underwent a systemic banking crisis compared with well below 10 percent of EMs.1 What’s more, EMs are forecast to contribute over 90 percent of global population growth and global middle-class spending growth between 2017 and 2030.2

From 1980 to 2007, this long-term economic promise of EMs—with some notable ups and downs—was largely fulfilled. The world economy was characterized by increasing foreign direct investment (FDI) and global trade, greater labor mobility, and economic growth. Political cooperation and technological advances connected people and economies and spurred a period of rapid globalization, producing GDP growth in EMs that significantly outpaced the growth in developed markets.

Real GDP Growth in Emerging Markets Has Outpaced Developed Markets

 

Year

Advanced Economies

Emerging Market and Developing Economies

1980

1.342

3.428

1981

1.903

1.835

1982

0.205

1.552

1983

3.161

1.871

1984

4.88

4.237

1985

3.892

3.674

1986

3.257

4.341

1987

3.728

4.081

1988

4.858

4.549

1989

4.045

3.515

1990

3.176

3.905

1991

1.581

4.412

1992

2.24

2.329

1993

1.432

2.954

1994

3.371

3.048

1995

2.928

4.008

1996

3.065

5.053

1997

3.45

4.746

1998

2.778

2.237

1999

3.603

3.57

2000

4.116

5.758

2001

1.565

3.681

2002

1.722

4.525

2003

2.053

6.98

2004

3.222

7.945

2005

2.77

7.187

2006

3.013

8.061

2007

2.683

8.573

2008

0.131

5.775

2009

-3.407

2.865

2010

3.059

7.426

2011

1.723

6.319

2012

1.178

5.414

2013

1.322

5.063

2014

1.954

4.654

2015

2.145

4.246

2016

1.686

4.131

2017

2.005

4.485

Source: International Monetary Fund (IMF).

New engines of growth emerge

If emerging markets can no longer ride on the coattails of developed-market economic growth, global trade liberalization, or Chinese supply chains, where will growth come from? As emerging markets adapt to the changing geopolitical and economic environment, five new potential drivers of EM growth develop.

  1. Trade expansion within emerging markets
    From 1980 to 2015, EM exports to developed markets grew more than tenfold, from $0.4 trillion to $3.8 trillion.3 However, as protectionist policies increase in developed markets, EMs will increasingly need to look at other EMs for new and expanded trade links. Indeed, trade among EMs is already on the rise, up from 25 percent of global EM exports in 1995 to 40 percent in 2015.4 Going forward, EMs will have opportunities to tap into China’s growing consumer market and link into India’s supply chains.

  2. The demographic dividend
    The youthful populations and expanding labor force in Africa and South Asia should help generate strong economic growth and higher savings. By 2030, EMs will add an estimated 1.7 million workers a month to their labor force, significantly more than what China added every month during its rapid expansion from 1978 to 2011.5 But a bulge in the working-age population must be accompanied by policies and institutions that help promote jobs and reduce income inequality. If youthful populations enter the workforce without meaningful employment opportunities, and if only those at the top benefit from the demographic dividend, countries are likely to face social and political unrest instead of strong economic growth.

  3. The rising middle class
    The rapidly growing middle class in EMs spans many countries, not just the BRICs, and is increasingly urban, aspirational, connected, and wealthy. The EM middle class includes more than 1.5 billion people spending upward of $15 trillion annually. Research by McKinsey and the Brookings Institution suggests that this figure will rise to more than $30 trillion by 2030—about three times the current consumption levels in the United States—and radically reshape the global consumer map.

    Harnessing the growing domestic spending power of the rising middle class will be critical for many EMs as they look to balance their economies between export-led growth and internal growth drivers.
     

    Decade When a Country Is Mostly Middle Class Rather Than Mostly Poor 6

    Overall Emerging Market Share of Global Middle Class Consumption

    1960s

    Jamaica, Singapore

    16%

    1970s

    Malta, Taiwan, Cote d’Ivoire, Seychelles, South Korea

    16%

    1980s

    Costa Rica, Uruguay

    18%

    1990s

    Chile, Peru, Bosnia and Herzegovina, Albania, El Salvador

    23%

    2000s

    Russia, Malaysia, Belarus, Iran, Tunisia, Kazakhstan, Venezuela, Ukraine, Dominican Republic, Brazil, Syria, Armenia, Thailand, Colombia

    32%

    2010s

    Panama, Ecuador, Egypt, Turkmenistan, Georgia, Sri Lanka, Botswana, Moldova, Paraguay, Gabon, Jordan, China

    46%

    2020s

    Indonesia, South Africa, India, Azerbaijan, Cambodia, Vietnam, Fiji, Bangladesh, Philippines, Tajikistan, Uzbekistan, Guatemala, Morocco, Sudan

    62%

    Source: Büge, M., & Brandi, C. (2014): A Cartography of the New Middle Classes in Developing and Emerging Countries (Discussion Paper 35/2014). Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE); Kaufmann, Daniel, Kharas, Homi and Penciakova, Veronika (2012, July 18). Development, Aid and Governance Indicators (DAGI). Retrieved from https://www.brookings.edu/interactives/development-aid-and-governance-indicators-dagi.
     

  4. Taking advantage of digital disruption
    For EMs able to adapt to disruptive innovations, the digital age may bring new opportunities. For example, less advanced EMs with limited brick-and-mortar footprints in the financial services and healthcare sectors may be able to “leapfrog” the missing physical infrastructure by embracing financial technology (fintech) and mobile solutions.

    Taking advantage of digital disruption will require investing in physical capacity—such as high-speed broadband, data centers, and cell towers—as well as regulatory reform to encourage digital entrepreneurship and education programs that create digitally savvy and technologically educated workforces for jobs that can be done remotely.

  5. Harnessing the growth of local capital markets
    The development of local capital markets will drive investment and economic activity in EMs—a particularly important evolution for effectively capturing and efficiently allocating domestic savings. The International Monetary Fund (IMF) has noted that such capital-market development “is widely believed to confer important stability benefits, helping countries limit swings in asset prices, find alternative sources of funding, and attenuate the need for reserve accumulation.”7 Deepening local bond markets can also help reduce balance-sheet mismatches by allowing firms, households, and governments to raise funds in domestic currencies and at longer maturities.

 

Read PGIM’s new white paper, Emerging Markets at a Crossroads PDF opens in a new window   for a deeper dive into the forces shaping emerging market growth and to understand the investment implications of the new EM landscape.

 


1 Luc Laeven and Fabián Valencia, Systemic Banking Crises Database: An Update, International Monetary Fund (IMF), June 2012. Percentages were calculated using IMF definition of “Emerging and Developing Economies” for emerging markets and “Advanced Economies” for developed markets. Systemic banking crises include Austria (2008), Belgium (2008), Denmark (2008), France (2008), Germany (2008), Greece (2008), Hungary (2008), Iceland (2008), Ireland (2008), Italy (2008), Kazakhstan (2008), Latvia (2008), Luxembourg (2008), Mongolia (2008), Netherlands (2008), Nigeria (2009), Portugal (2008), Russia (2008), Slovenia (2008), Spain (2008), Sweden (2008), Switzerland (2008), Ukraine (2008), the United Kingdom (2007), and the United States (2007).

2 Custom data acquired via World Population Prospects: The 2015 Revision, United Nations, Department of Economic and Social Affairs, Population Division, 2015; raw data Daniel Kaufmann, et al. Development, Aid and Governance Indicators (DAGI), Brookings Institution, July 18, 2012. Retrieved from https://www.brookings.edu/interactives/development-aid-and-governance-indicators-dagi.

3 IMF Direction of Trade Statistics 1980–, UK Data Service. DOI, Edition: February 2015, http://dx.doi.org/10.5257/imf/dots/2015-02.

4 IMF Direction of Trade Statistics.

5 Peter Henry, “Dividends or Disaster: Why A Sustained Rise in Capital Flows From Rich Economies to Emerging Ones Is Sorely Needed,” The Economist, 2017, http://www.theworldin.com/edition/2017/article/12772/dividends-or-disaster.

6 Poverty is defined as a daily income of US $5 (2005 US$ PPP) or less. Middle class is defined as a daily income of US $10 to $100 (2005 US$ PPP). When the threshold is passed several times, the latest year is used. For our purposes, the 1960s includes 1965 to 1969 only.

7 Rishi Goyal, et al., IMF Staff Discussion Note: Financial Deepening and International Monetary Stability, IMF, October 19, 2011, www.imf.org/external/pubs/ft/sdn/2011/sdn1116.pdf.

 

Definitions
BRICs
is an acronym for the combined economies of Brazil, Russia, India and China.
International Monetary Fund (IMF) is an international organization created for the purpose of standardizing global financial relations and exchange rates.

 

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