ECONOMY SPECIAL .......Outperformers: High-growth emerging economies and the companies that propel them PART I

Outperformers: High-growth emerging economies and the companies that propel them PART I

Some emerging economies have grown much faster and more consistently than others. Underlying these success stories is a pro-growth policy agenda and the standout role of large companies.

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. Yet economic performance among individual countries varies substantially.

Why do some emerging economies outperform the rest?

Some emerging economies have managed to achieve strong and consistent growth over a long period. These are the outperformers. What’s the secret to their success?

In Outperformers: High-growth emerging economies and the companies that propel them, the McKinsey Global Institute looks at the long-term track record of 71 developing economies to identify the outperformers—and finds two key factors that help explain their outperformance: a pro-growth policy agenda of productivity, income, and demand that has driven exceptional economic growth, and the underappreciated but nonetheless standout role that large companies have played in driving that growth.

1. Eighteen of 71 countries outperformed their peers and global benchmarks.

2. A pro-growth agenda of productivity, income, and demand has driven outperformance.

3. The role of productive companies is a key characteristic of outperforming economies.

4. Changing times spell potential new opportunities for emerging economies.

5. The global economy could receive an $11 trillion boost if all emerging economies emulate outperformers.

1.         Eighteen of 71 countries outperformed their peers and global benchmarks

We analyzed the per capita GDP growth of 71 economies over 50 years, starting in 1965. Of these, we identified 18 as outperformers, about one in four.

Seven economies achieved or exceeded real annual per capita GDP growth of 3.5 percent for the entire 50-year period. This threshold is the average growth rate required by low-income and lower-middle-income economies to achieve upper-middle-income status over a 50-year period, as defined by the World Bank. The seven are China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, and Thailand.

We also found a second group of 11 more recent, less heralded, and more geographically diverse outperformers. They achieved real average annual per capita GDP growth over the 20 years between 1995 and 2016 of at least 5 percent. The 11 are Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan, and Vietnam.

These 18 countries not only showed exceptional average performance but also demonstrated consistency by exceeding the benchmark growth rate in at least three-fourths of the 50 and 20 years, respectively.

Collectively, these outperformers have been the engine for lifting one billion people out of extreme poverty, defined by the World Bank as living on less than $1.90 per day. Rising prosperity in these countries has not just reduced poverty but has also enabled the emergence of a new wave of middle and affluent classes. Between 1990 and 2013, the number of people living in extreme poverty in the 71 emerging economies fell from 1.84 billion to 766 million. Outperformers accounted for almost 95 percent of that change.

Less than 11 percent of the world’s population now lives in extreme poverty, down from 35 percent in 1990.

At the same time, growing numbers of residents of these countries joined the “consuming class”—that is, people with incomes high enough to become significant consumers of goods and services. In India, for example, the number of consuming-class households rose tenfold in two decades, from 3.4 million in 1995 to more than 35 million in 2016. Globally, these highly urbanized consumers have become a powerful motor for global economic growth. Outperformers accounted for almost half of the growth in household spending of all emerging economies in the past 20 years.

2.         A pro-growth agenda of productivity, income, and demand has driven outperformance

While the 18 outperformers vary considerably—spanning different income levels, sizes, factor endowments, and regions—with the exception of Latin America, our analysis suggests they share foundations of similar pro-growth cycles of rising productivity, income, and demand. Part and parcel of these foundations are competition policies that created an impetus for productivity growth and helped forge the big companies that have driven a significant part of GDP growth.

More than two-thirds of the GDP growth in outperforming countries over the past 30 years is attributable to a rapid rise in productivity correlated with industrialization: an annual average productivity gain of 4.1 percent versus 0.8 percent for the other developing economies. That rapid development initially drives the pro-growth cycle by creating wealth and boosting demand, which translates into more jobs.

Capital accumulation—enabled by high rates of investment and domestic savings—contributed an average of 3.8 percentage points to economic growth each year between 1990 and 2015 for the seven 50-year outperformers in our sample, and five percentage points for the 11 shorter-term outperformers between 1995 and 2015.

Investment as a share of GDP averaged 30 percent for long-term outperformers and 20 percent for recent outperformers, or three to 13 percentage points higher than investment in other developing economies. The difference in domestic savings as a share of GDP was ten to 30 percentage points higher.

The outperformers could tap into higher levels of domestic savings, some of which was required by government-run pension-savings schemes, and some of which was encouraged by governments developing strong financial institutions and convenient digital banking services. Higher domestic savings enabled more investment in infrastructure, among other areas. Outperformers also attracted the largest share of foreign investment, almost 70 percent, of the approximately $900 billion invested in emerging markets between 2000 and 2016.

Strong productivity growth translated into exceptional income growth. Real wages and benefits rose by an average 4.6 percent annually in the seven long-term outperforming countries between 1980 and 2014.

China led the way, with incomes there rising by 8.6 percent annually. Among the more recent outperforming countries, real wages and benefits grew by 6.0 percent per year between 1995 and 2014. This was about triple the level in other developing and advanced economies. Household consumption spending generated by rising incomes grew about three percentage points faster in the 18 outperforming countries than in other developing or advanced economies.

Another essential feature of these countries has been their ability to achieve macroeconomic stability, even at a time of global volatility, by adapting policies to fit their local context and changing conditions. For example, governments took quick action to ensure rapid recovery from volatile episodes, such as the Asian financial crisis of the late 1990s and the global financial crisis of 2008 and 2009.

Outperforming economies have also benefited from their ability to tap into global demand growth through export markets, giving them greater economies of scale. In 1980, outperformers accounted for less than 10 percent of global inflows and outflows of goods, services, and finance. By 2015, they had increased their share to 20 percent or more.

Competition policies also created impetus for productivity growth. Many outperformer countries recognized the importance of competitive private-sector companies and nurtured environments in which they could invest and compete, even as they created incentives for productivity improvements. Rather than picking winning sectors or winning companies within sectors, they focused on boosting productivity within sectors.

As a result, sectors with a larger share of big companies grew faster, increased productivity by more than their peers, paid workers better, and realized greater levels of investment. In some, but not all, countries, governments helped incubate competitive domestic companies through sectorwide support for infant industries, including low-cost loans, preferential exchange rates, low tax rates, and R&D subsidies.

Protection, however, was gradually lifted as these industries became more competitive, limiting market distortions. In some cases, support was tied to conditions that encouraged companies to increase productivity. For example, South Korea’s import policy in the 1960s strictly limited all but strategic imports and imposed high tariffs, but the country gradually transitioned to a more (but still not entirely) open scheme in the 1980s.

CONTINUES  IN PART II