Global Growth Generators: A New Economic Picture for 2050

 

by Helen Sanders, Editor

In February 2011, Citigroup’s Chief Economist, Willem H. Buiter and Ebrahim Rahbari published a ground-breaking report that argued that the ‘BRIC’ countries, and subsequent groupings of emerging economies had become obsolete. Instead, they aimed to identify the generators of global growth (known as ‘3Gs’) and profitable investment opportunities for the next 40 years, with globalisation as a key catalyst for change.

Globalisation, a trend that the authors identify as starting in the 1950s,

“was driven by technology (improvements in information, communication and transportation technology) and by the deliberate removal of man-made obstacles to cross-border movements of goods, services, capital, people, business and ideas. Globalisation went hand-in-hand with the adoption of some form of market economy in many countries where markets had hitherto been suppressed, supplanted with various forms of central planning, or over-regulated.”

They continue,

“One key insight was the distinction between growth at the technology frontier and catch-up or convergence growth.”

In other words, how long does it take for less developed economies to ‘catch up’ with those that demonstrate the most advanced technology, education and market infrastructure? While the most advanced countries typically demonstrate only modest growth, convergent growth can be much faster, as the fortunes of China over recent years have demonstrated. While globalisation is a catalyst for less-developed countries to catch up with the so-called frontier countries, this advancement process is not guaranteed. The authors argue that countries will remain economically backward unless there is a change in the causes of this backwardness,

“The causes of economic backwardness are bad luck, bad institutions, and/or bad policies. Bad luck includes such factors as geography, climate, unfriendly neighbours (and associated wars and other cross-border conflicts), and natural disasters, including pandemics.

Bad institutions can be institutions that were supportive of reasonable or even good economic performance at some earlier stage of technological, social, political, cultural and economic development but have become economically dysfunctional as these evolved. Slavery, serfdom, indentured labour, the caste system, guilds, feudalism and central planning all fit that bill.

The damage done by bad policies, including populist assaults on the incentives to work, save and invest, macroeconomic mismanagement leading to serial sovereign debt default and hyperinflations, ill-designed tax, public spending and regulatory policies that cause damaging internal conflict, are well-known.”

With these issues in mind, Buiter and Rahbari then constructed an index that ranked countries globally according to a number of measures, and concluded that the following countries will demonstrate the greatest growth and profitable investment potential in the coming years Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam. Of these, Vietnam has the greatest potential, followed by China.[[[PAGE]]]

A wider economic view

Different economists will adopt their own growth forecast models, and may therefore rank individual countries differently, but it is universally acknowledged that Asia and Africa are the regions that have the greatest growth potential for the future. HSBC’s ‘World in 2050’ Report, published in January 2012, has similar findings to those of Buiter and Rahbari, highlighting massive demographic changes, a contracting working population in today’s developed economies and political and market infrastructure changes. Many of the countries that the author, Karen Ward, highlights in the HSBC report are consistent with those identified by Buiter and Rahbari, in addition to countries such as Peru and Chile in Latin America.

While the success story in Asia is well-known, the opportunities in Africa are comparatively embryonic, but this is not to say that companies should therefore wait longer before exploring investment opportunities. For example, seven out of the top ten fastest growing economies globally over the next five years will be in Africa according to the International Monetary Fund (IMF). As Jeff Gable, Head of Africa Non-Equity Research, Absa/ Barclays explained in his article ‘New Corporate Growth Horizons in Africa’ in the recent publication Africa: New Region, New Partner, New Growth published by TMI in association with Barclays,

“Inevitably, Africa’s wealth of raw materials and energy resources is a draw for multinational companies, with over 80% of the world’s platinum and chromium, 60% of diamonds and 40% of gold reserves. China is now the largest energy user in the world (source: International Energy Agency) with growing demand in most regions of the world. Furthermore, the pursuit of natural resources to produce technology components continues to be relentless. Consequently, companies globally across a wide variety of industries will increasingly be seeking to establish sources of raw materials and energy resources in Africa.”

Changing trade patterns

Karen Fawcett, Group Head of Transaction Banking, Standard Chartered, describes how globalisation is also leading to changing trade patterns, and creating new market dynamics,

“We are witnessing a shift of power from west to east with new trade corridors emerging such as between Asia and Africa, Latin America and Asia, and Central & Eastern Europe and Asia (figure 1). There are a number of factors that are driving this, both from a supply and demand perspective. As Asian multinationals emerge strongly, they are seeking new sources for natural resources, including commodities to support the technology sector as well as energy and metals. In addition, access to food production and low-cost manufacturing are important supply drivers. Demand is also changing, with a rapidly emerging middle class in countries such as China and urban migration in Asia and Africa.”

Jeff Gable, Barclays concurs,

“Its colonial past perhaps suggests that trading routes between Africa and European countries, for example, would facilitate growth in Africa. While strong trading links exist between Europe/Africa, and North America/Africa, we are seeing enormous growth in international trade between Asia/Africa, particularly China, as well as Latin America/ Africa. For example, trade flows between China and Africa have increased 20-fold in the past 10 years, compared to growth of around three times between Europe and Africa.” [[[PAGE]]]

Spotlight on 3G countries

So what’s happening now in the 3G countries identified by Buiter and Rahbari? In the next section of this article, we look at each of the 11 countries individually. What is clear is that far from being a cohesive group that demonstrate similar characteristics, these countries have very different economic starting points, challenges and potential for the future. As we explore each country, albeit briefly, we are pleased to welcome John Laurens, Head of Global Payments and Cash Management, HSBC, who shares his thoughts and insights.

Bangladesh

As well as experiencing considerable political uncertainty at various times since its separation from Pakistan in 1971, Bangladesh is a country that is ‘unlucky’ according to Buiter and Rahbari’s definition, in that around a third of the country floods each year, hampering economic development, exacerbating poverty and creating major insecurity and vulnerability amongst the huge population affected. Political stability in recent years is increasing Bangladesh’s prospects as a destination for foreign investors. Economic growth has averaged 5-6% per year since 1996, including during the 2008-9 financial crisis, despite challenges such as political instability, corruption, poor physical, power and communications infrastructure and slow implementation of economic reforms.

Overcoming poverty is still a major challenge in Bangladesh. Remittances from Bangladeshis living overseas totalled $11bn in 2010, accounting for almost 12% of GDP, exceeded only slightly by garment exports of around $12.3bn (2009). However, Bangladesh has the seventh largest workforce in the world, a large proportion of the population speaks English, and there is considerable appetite for developing new industries. John Laurens, HSBC summarises,

“Bangladesh is an important market for HSBC, in particular for trade finance. While Bangladesh is best known for garment manufacturing, it is also developing as a location for electronic goods manufacturing, and has considerable potential for delivering a growing range of value-added services in the future.”

China

A short survey article such as this cannot explore China’s achievements and prospects in any detail, but John Laurens, HSBC provides a snapshot,

“Although growth levels have softened a little, China continues to demonstrate impressive economic credentials, particularly when compared to other markets. Not only is China the fastest-growing, but it is also the second largest market in the world, eclipsed only by the United States. Such remarkable growth brings challenges; for example, increasing manufacturing costs will inevitably have an impact, but China’s story is changing. No longer is it primarily viewed as the ‘world’s factory’ but it is also an attractive sales destination for multinational corporations to cater for the needs of a rapidly growing and influential middle class. While the opportunities that exist for each industry differ, there is obvious and immediate demand for luxury and lifestyle goods, automotive, designer apparel, education and healthcare. Products such as white goods are less attractive as there is stronger competition from Chinese brands, but despite the economic success China has already achieved, it remains early days in its development.

Multinational corporations (MNCs) headquartered in Europe or North America are not only experiencing competition from Chinese companies in China. Chinese companies are rapidly expanding their international footprint, a process that HSBC is actively supporting. These companies are acquiring businesses both in other parts of Asia and further afield, with the intention to achieve in two or three years what established MNCs may have taken 10 years to achieve. To support this rapid growth and increasing financial complexity, Chinese MNCs are establishing regional and global treasury centres and implementing cash and liquidity management solutions, supported with considerable resources, determination and investment in technology.

We expect to see continued regulatory and currency liberalisation over the coming years to fuel Chinese trade, incentivise foreign investors and facilitate the development of Shanghai as a global financial centre.”

One article cannot do justice to China’s remarkable economic success story, but what is clear is that the journey has really just started. Although China is already the world’s second largest economy, GDP per capita is still only 17% of that of the United States. China is both the beneficiary and the catalyst for further globalisation and investment opportunities still abound.[[[PAGE]]]

India

India is still arguably a ‘sleeping giant’ compared with China, but has the potential to eclipse China in the future according to some economists. While the services and technology industries have been particularly important in India’s growth, it has a strong heritage of highly diversified businesses which is likely to permit sustainable growth in the future. John Laurens, HSBC discusses,

“Like China, India is a huge market with attractive rates of growth and enormous potential. With the exception of some large Indian conglomerates acquiring overseas businesses, India has demonstrated less external orientation than China so far, but its importance as a consumer and supply market cannot be underestimated. A key priority in India is establishing communications between different parts of the country, in addition to international links, to facilitate trade in the future.”

Indonesia

Like many of the countries we have already highlighted in this article, Indonesia has experienced political instability as well as natural disasters which makes its economic growth fragile. John Laurens, HSBC highlights its potential however,

“Indonesia is an example of an ASEAN country that is leveraging closer ties in the region to develop trading opportunities, particularly in industries such as oil and gas, palm oil and metals and mining. As a result, Indonesia is also becoming an increasingly important trade link for countries such as Australia and China where there is considerable demand for these products.”

Indonesia still has many challenges to overcome, not least addressing corruption, improving educational standards, infrastructure and public health, and introducing economic and financial reforms. However, since 2004, there has been considerable momentum in these areas, combined with financial conservatism that has led to greater stability and investor confidence, endorsed by an increase in Indonesia’s credit rating in December 2011.

Iraq

Nearly a year after the exit of US and coalition forces, economic development in Iraq is blossoming in certain sectors, particularly energy, construction and retail, despite on-going political fragility and the need for a major overhaul in physical and market infrastructure. The oil sector continues to dominate the economy, providing more than 90% of government earnings, and although oil prices remain high, Iraq will need to invest in infrastructure to facilitate further growth in this industry. With increased wealth and greater internal stability, there is also potential for a wider range of industries in areas such as education, healthcare, infrastructure and communications, but major policy reforms are still required to facilitate this. There is however, significant motivation to attract foreign direct investment, which is likely to fuel these reforms.

Iraq is becoming a more important country for some international banks, enabling foreign multinationals operating in Iraq to manage their cash and risk requirements within the country within a wider regional or global framework.[[[PAGE]]]

Mongolia

Mongolia is perhaps the most surprising country in the list of countries with the greatest growth potential. A quick household survey suggested that the only associations people had with Mongolia were Genghis Khan and the Gobi desert. The country has no arable agriculture, enormous climactic vulnerability and experienced deep recession after the Soviet Union withdrew economic support in 1990-91. Despite this, Mongolia has been experiencing a boom in mining, with a variety of valuable metals and mineral deposits, including copper, gold, coal, molybdenum, fluorspar, uranium, tin, and tungsten. While there are still challenges, not least the massive impact of a drought in 2010, high inflation and money laundering, wealth creation in the mining sector will result in greater potential for incoming investors. John Laurens, HSBC notes,

“At present, the opportunities in Mongolia are still mostly restricted to financial institutions, which we are supporting through USD, GBP and HKD clearing as well as financing. However, we are starting to see a handful of companies in industries such as real estate and food products establishing a presence in Mongolia, and are therefore seeking on-the-ground support from their partner bank. Currently, we use expert local partners to provide this capability as Mongolia is still such a fledgling market, but it is a region in which we expect to see growing commercial interest.”

The changing economic fortunes of Mongolia, despite on-going vulnerabilities, are a clear example of how new trade routes are developing. Over 92% of exports are to China, and more than 60% of imports are from countries in Asia, and 25% from Russia.

Nigeria

Despite considerable political tensions and uncertainties existing right up until the present time, Nigeria continues to enjoy the longest period of civilian rule since independence in 1960. This continuity and relative stability is providing an improved backdrop for reforming a petroleum-based economy and tackling corruption and financial mismanagement. Since 2008, considerable progress has been made towards market and banking reforms, including a commitment to greater transparency and improved fiscal management. These have contributed to strong GDP growth through both high oil prices and greater economic diversification. Consequently, there are now considerable incentives for companies providing physical and communications infrastructure in Nigeria, and for investors, supported with a substantial presence by banks such as Standard Chartered and Citi in addition to a number of well-established local banks.

Philippines

GDP in the Philippines grew 7.6% in 2010, fuelled by growing consumer demand, exports and investments, although this dropped off to 3.7% in 2011. In general, however, the Philippines weathered the global financial crisis well compared with other Southeast Asian economies. It has a relatively low dependence on exports, resilient domestic consumption, and receives large remittances from overseas Filipino workers. John Laurens, HSBC comments,

“After some years of reasonable but uninspiring growth, we are now seeing stronger, more consistent growth in the Philippines. From the perspective of multinational corporations, the Philippines is an important centre for specialist manufacturing, such as pharmaceuticals and consumer goods, and for customer services, media and communications; in addition, however, it is also becoming an increasingly important consumer market. In recent times, we have started to see the Philippines as a centre for managing regional banking services.”

According to the HSBC World in 2050 Report, the Philippines has the potential to become the sixteenth largest economy in the world over this period, up 27 places from today, suggesting that the Philippines is a market that many companies should be considering strongly as part of their growth strategy.[[[PAGE]]]

Sri Lanka

Since the end of the conflict between the government and LTTE in 2009, the Sri Lankan government has embarked on an ambitious programme of economic development projects, many of which are financed by loans from the Chinese government. While the 2008-9 crisis created considerable economic challenges, growth has since rebounded and the country is currently enjoying considerable foreign and domestic investment. The country is diversifying its industries across commodities, secondary industries and the services sector, leading to large-scale opportunity for many industries. John Laurens, HSBC agrees,

“We are certainly seeing greater investment in Sri Lanka now that the country enjoys greater stability, which fuels further growth potential. Tourism is an obvious growth industry, and we are assisting companies to achieve their expansion plans with financing, cash and treasury management solutions. Sri Lanka also has the potential to become an important location for multinational shared service centres; although it is still early days, this is a considerable opportunity.”

While exports from Sri Lanka are typically to western economies such as US and Europe, a greater proportion of imports are from Asian and MENA countries with India, China, Singapore and Iran being the largest import partners.

Vietnam

Vietnam was identified by Buiter and Rahbari as being the country with the greatest growth potential of all the 3G economies, and HSBC also lists the country as being one of those with the strongest growth. John Laurens, HSBC warns however,

“Vietnam has progressed to some degree along the development path but it still has a great deal of potential to fulfil. Most business is still cash-based, and the country’s financial infrastructure, such as clearing systems, is still in its relatively early stages. Vietnam is positioning itself as a lower cost manufacturing alternative to China, but there is some way to go yet in developing the relevant physical, communications and regulatory infrastructure to achieve this; however, despite a short-term hiatus, the future looks more positive.”

As an example, he continues,

“The Korean chaebol [business conglomerates] that have promoted the development of industries such as electronics in China are now taking their business models to Vietnam. At HSBC, we are helping to connect markets, and the Korea-Vietnam trade corridor is likely to become increasingly important.”

The government in Vietnam is proactively engaged on economic and fiscal liberalisation, although it still has to contend with low foreign exchange reserves, an undercapitalised banking sector, and high borrowing costs.

Leveraging the opportunity

While the Citi and HSBC reports both focus on growth potential up to 2050, each country’s economic fortunes is unlikely to be linear, and in some cases, the opportunities will materialise earlier than in others. There remain major challenges in many cases. Jeff Gable, Barclays illustrates for example,

“Today, lack of infrastructure, whether physical, technical, financial or socioeconomic, remains a significant impediment to Africa’s competitiveness, but as investment continues, this is likely to be relatively short-lived.”

International banks are expanding their footprints across many of these new economies, both responding to, and anticipating demand from multinational clients. This in turn gives multinational corporations greater confidence in pursuing their expansion plans. Karen Fawcett, Standard Chartered outlines,

“At Standard Chartered, we are deepening our footprint in the growth economies of the future. For example, we are expanding from a representative office to a full branch in Angola. We continue to add branches rapidly in China, as well as in India and Nigeria. In addition, we are investing in our electronic channels in emerging regions to support clients’ efficiency and automation objectives and achieve consistency at a regional and global level. In some countries in Africa, for example, that have a predominantly cash-based economy, it is important for a bank such as Standard Chartered to establish a presence that is efficient and valuable for its clients to reduce reliance on ‘bricks and mortar’.” [[[PAGE]]]

Buiters and Rahbari give a quick (and somewhat tongue in cheek) ‘guide’ to how to succeed economically:

“This is how a nation grows fast:

• Start poor;
• Start young;
• Open up to trade in goods and services and to foreign direct investment;
• Achieve reasonable political stability (the absence of significant external and internal conflict);
• Create some semblance of a functioning market economy;
• Boost the domestic saving and investment rates;
• Invest in human capital (educate and train both boys and girls, focusing on pre-school, primary and secondary education and on vocational training);
• Invest in infrastructure;
• Don’t be unlucky. Avoid war-like neighbours and natural disasters;
• Don’t blow it. Avoid internal conflict and populist assaults on the incentives to work, save and invest; avoid macroeconomic mismanagement, premature capital account liberalisation and financial regulatory disasters.

Catch-up and convergence will do the rest.”

As companies increasingly explore new global opportunities, treasurers will invariably have a major role to play, just as they have done in supporting global growth until now. As John Laurens expresses,

“It is vitally important for our customers that as they invest in these markets, and other current and future high-growth economies, that they have access to consistent cash and treasury management solutions. For example, integration between companies’ internal treasury and ERP systems, standardised file formats for electronic payments and account reporting and cohesive liquidity management solutions are all priorities. In some markets, it may be difficult to concentrate or repatriate cash flow, so companies are seeking notional pooling solutions to leverage balances across the group without the physical movement of cash, and yield enhancement for cash held in-country.”

Maintaining financial flexibility, detailed market knowledge and close banking relationships has never been more important, facilitating and fuelling growth, and creating competitive advantage in the years to come. As Karen Fawcett, Standard Chartered concludes, treasurers need to be prepared to explore innovative approaches to cash and treasury management, in the same way as new business models evolve in investment countries:

“Financial infrastructure is developing differently in today’s fast-growing economies than in well-established regions, typically ‘leapfrogging’ legacy technology and creating new paradigms. For example, while many parts of Africa and Asia have a large unbanked population and a strong cash-based culture, mobile banking is developing at a rapid rate. Multinational corporations doing business in these regions, which often involves complex distribution models, are increasingly seeking to leverage these opportunities to enable them to do business more effectively.”

 

 

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Sources:

Willem H. Buiter and Ebrahim Rahbari (2011). Global Growth Generators; Moving Beyond ‘Emerging Markets’ and BRIC, Citi Global Economics, 21 February 2011

Centre for Economic Policy Insight No. 55, April 2011. Buiter & Rahbari

Karen Ward. The World in 2050. From Top 30 to Top 100. HSBC Global Research. January 2012.

Inter-Regional Trade Statistics, 2010-2030. Standard Chartered Global Research.

Jeff Gable, ‘New Corporate Growth Horizons in Africa’, in Africa: New Region, New Partner, New Growth. Treasury Management International, published in association with Barclays. September 2012

All statistics from CIA World Factbook unless otherwise indicated.