New analysis of 71 countries just released by The McKinsey Global Institute (MGI) at World Economic Forum 2018 on Asian has identified key pro-growth policies and highlights standout role of companies in driving outperformance.
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, as individual countries, their economic performance varies substantially. A new McKinsey Global Institute (MGI) report, Out-performers: High-growth emerging economies and the companies that propel them, identifies the emerging economies which have achieved a track record of stronger and more consistent growth than their peers and examines key factors determining their outperformance.
Of the 71 major emerging economies the report analyzes, 18 economies—about one in four—are classified as “out-performers”:
• Seven achieved more than 3.5 percent per capita GDP growth over 50 years, between 1965 and 2016. They are China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, and Thailand.
• Eleven others grew at a faster pace for a shorter period—5 percent annually in the 20 years from 1996 to 2016. They are Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan, and Vietnam.
While these economies and individual policies differ, outperformers tend to have two fundamental elements in common, the report finds. The first is a pro-growth policy agenda that creates a virtuous cycle of productivity, income, and demand and which encourages savings, ensures stability, and fosters competition and innovation. The second is the outsized—and underappreciated—role of large companies in driving productivity and growth. The 18 outperformers identified in the report have almost twice as many large firms (defined as publicly listed ones with annual revenue over $500 million) as other developing countries, adjusted for the size of the economies.
“Development economists have studied and written a lot about policies that have driven growth in emerging economies, and of course good policy is a must,” said Jonathan Woetzel, a director of the McKinsey Global Institute who is also a McKinsey & Company senior partner in Shanghai, the report’s lead author. “But one of the insights of our research is that highly competitive businesses have also played a critical role in propelling GDP growth—a role that is too often overlooked.”
“Decoding the combination of productivity-enhancing policies and the competitive dynamics in these outperforming emerging economies provides lessons for all countries, emerging economies and advanced economies alike, at a time when productivity growth globally has waned,” said James Manyika, chairman of the McKinsey Global Institute and a McKinsey senior partner in San Francisco.
Extending the winning formula of outperformers to all emerging economies could add $11 trillion to the global economy by 2030, a 10 percent boost equivalent to the size of China, according to the report. Out of this, $8 trillion would be the direct contribution from non-outperformers today, assuming they were able to achieve the same productivity growth rates as outperforming countries. With this productivity boost from them, emerging economies could continue to contribute more than two-thirds of global growth by 2030.
Lifting one billion people out of poverty
The 18 outperforming economies identified in the report have lifted about one billion people out of extreme poverty since 1990, helping to meet an emblematic United Nations Sustainable Development Goal. In the 71 countries overall, the number of people living in extreme poverty fell from 1.7 billion to 580 million between 1990 and 2013. The 18 outperformers accounted for almost 95 percent of that change. They were led by China (approximately 730 million lifted out of extreme poverty), India (170 million), and Indonesia (80 million).
Rising prosperity in these countries has also enabled the emergence of a new wave of middle and affluent classes with enough money to save and consume. Outperformers accounted for almost half of the growth in household spending of all emerging economies in the past 20 years.
“Long-term outperformers in particular have managed to achieve stable growth despite the Asian financial crisis of 1997, the global financial crisis of 2008, and other macroeconomic shocks and, together with policies enhancing inclusive growth, that has enabled their middle classes to flourish and expand considerably,” said Anu Madgavkar, a partner at the McKinsey Global Institute based in Mumbai.
Two major factors driving outperformance
The report highlights two major factors driving outperformance. First, outperforming economies tend to develop a pro-growth agenda across public and private sectors aimed at boosting productivity, income, and demand. Steps to boost capital accumulation, including (sometimes) forced savings, are a common feature, as are deep connections to the global economy through cross-border flows of goods, services, finance, and people. Governments in these countries have tended to invest in building competence, are agile and open to experimentation, and willing to adapt global practices to the local contexts. Critically, competition policies they implement create an impetus for productivity growth, increased investment, and the rise of competitive firms.
Second is the standout role of large companies in driving GDP-per capita growth. From 1995 to 2016, large firms’ revenue relative to GDP in outperforming developing economies almost tripled—from the equivalent of 22 percent of GDP to as much as 64 percent. That is more than double the level in other developing economies. The contribution of value added by these outperformer firms to GDP was also twice the share of their peers, and grew from 11 percent in 1995 to 27 percent in 2016. Large firms have scale to invest more in R&D, drive global expansion, train employees, and pay higher wages. This can create a spillover effect, especially to smaller firms connected to the ecosystem of large firms. At the same time, the rise of competitive large firms is dependent on strong small and medium enterprises to supply them.
Large companies in outperforming economies have tended to thrive in a highly-competitive domestic environment marked by contested leadership. Staying at the top is hard, the research finds: the top quintile of firms in terms of economic profit are more likely than not to be displaced by challengers, and they stand a better chance of falling further down the rankings than do companies in high-income economies.
Many firms from the outperforming economies are growing faster and providing higher shareholder returns than their peers in advanced economies. Companies ranked in the top quartile in terms of total return to shareholders delivered average returns of 23 percent from 2014 to 2016, compared with 15 percent for high performers in advanced economies.
They outperform their high-income peers in other ways too: A survey in the report showed that top firms in outperforming economies devote more attention to innovation, deriving 56 percent of their revenue from new products and services, eight percentage points more than their peers in advanced economies. They take decisions faster, and invest almost twice as much as comparable businesses in advanced economies, measured as a ratio of capital spending to depreciation. They are also more likely to prioritize growth outside their home markets—and in doing so, have become powerful global competitors.
“The role of contested leadership among these companies is very revealing and helps explain why they are emerging as formidable rivals to incumbents in advanced economies, said Jeongmin Seong, a senior MGI fellow based in Shanghai.
Looking to the next wave of out-performers
Looking forward, the report finds that the next wave of global growth can be led by a new set of emerging market outperformers that can on the one hand successfully drive pro-growth agenda while growing large productive firms and, on the other hand, adapt to changing global contexts. Manufacturing seems to be peaking earlier than it used to in developing countries, for example, automation is on the rise and cross-border trade flows have lost some of their dynamism since the 2008 financial crisis. New anchor economies might emerge and create opportunities. For example, as China moves away from some labor-intensive manufacturing and toward more R&D-intensive manufacturing, it is creating opportunities for India, Vietnam and other emerging economies, especially for goods produced in low-income countries from Indonesia to Uzbekistan. Overall, the share of goods trade among emerging markets, both south-south and China-south, have risen from 8 percent in 1995 to 20 percent in 2016.
The report concludes with an in-depth look at individual regions and identifies a number of countries including Bangladesh, the Philippines, Rwanda, and Sri Lanka, that could feature in a future wave of out-performers if they continue to put in place the economic fundamentals and maintain recent rapid growth.
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