4

THE NEW GROWTH MARKETS

The arrival as economic forces of the four BRIC economies and other large populous nations has increasingly led me to believe that the world economy is probably stronger and healthier than some might fear. It is not as dependent on the G7 economies as it was in my early days at Goldman Sachs, which, given their challenges, is a relief. The rise of China and the BRICs has not gone unnoticed among other large emerging economies. The remarkable success of China alone has encouraged other countries to explore ways of boosting their prosperity by becoming more engaged with the rest of the world.

Back in 2001 and 2003 many people wondered why we singled out only the four BRIC economies for dramatic growth. This prompted us to explore more closely the growth opportunity for other countries, and in our 2005 paper “How Solid Are the BRICs?” we introduced the “Next Eleven,” or N-11. It was simply a way to describe the next eleven largest populous emerging economies, and a study of their potential. In particular we tried to gauge whether any of them could become as relevant as the four BRIC economies.

The N-11 grouping is not particularly cohesive, but all eleven are developing countries with large populations and many would have exciting potential if they were to participate more fully in the global economy. It includes several contrasting nations: Mexico from Latin America, Turkey on the edge of Europe and Asia, Egypt and Iran from the Middle East, Nigeria from Africa, and six countries that span the whole of Asia—Bangladesh, Indonesia, South Korea, Pakistan, the Philippines and Vietnam.

Mexico and South Korea stood out as OECD members with by far the highest income levels in the group. South Korea in particular is closer to a developed country than a developing one, and its GDP per capita and high growth environment scores reflect that. As a result of their differences from the rest of the group, it seemed that any projection of the world’s largest economies up to 2050 might well include these two. Applying the same method to the N-11 as we had for the BRICs, we projected that by 2050 Mexico’s GDP could make it the world’s sixth largest economy, comparable to that of Russia, and that Indonesia, Nigeria and South Korea could overtake Italy and Canada. But aside from Mexico and possibly South Korea, the rest of the N-11 would not contribute to global economic growth to anything like the degree that the four BRIC countries will.

In terms of income per capita, we projected that South Korea would overtake every member of the current G7 except the United States, that Mexico would join Russia in converging on developed-country income levels and that Turkey, along with China and Brazil, would have per capita incomes similar to those we see in the United States today. If other N-11 members were to have any chance of catching up with the developed world, we said that a number of them would have to rely more on productivity gains because they lacked the vast populations we see in the BRICs. Some such as Bangladesh, Indonesia and Nigeria do have powerful demographics and they could see dramatic growth if they get their productivity improving. But even if this were to happen, Bangladesh and Nigeria are currently far too small to catch up with the BRICs in terms of size. Indonesia seems rather better placed, but it too would require strong productivity gains.

Studying the N-11’s growth environment scores in 2005, we found a wide range, from South Korea, which scored very well, to Nigeria, Pakistan and Bangladesh, which did very poorly. There are countries with specific weaknesses: Vietnam needs to reduce its government deficit, Turkey must improve its technology scores and be more open to international trade, while Iran’s political system scores low. Then there are those with broad-based challenges like Egypt, Indonesia, the Philippines, Bangladesh, Nigeria and Pakistan, which underperform in every area, from fiscal discipline to education, investment rates and health care. Even assuming the most optimistic growth paths for the N-11, we concluded that only South Korea and Mexico were serious candidates to have a BRIC-like impact on the world.

Though their growth environment scores since 2005 have progressed unevenly, all the N-11 countries have shown a desire to move down the path to growth. They may not succeed, but they merit our attention. We were not trying to pick winners when we selected them, but just to try to understand how to assess their actual and potential growth and determine whether they could be as powerful as any of the BRICs.

Looking toward 2050, we identified three different tracks the N-11 countries might follow.¹ The first we believed would apply to South Korea, Mexico and Turkey, where incomes and development levels are already reasonably high, growth conditions are decent and the challenge will be to sustain and improve those conditions in order to converge with the world’s richest economies. The second track would better suit two other traditionally strong emerging markets, Indonesia and the Philippines, which need to advance further to get closer to the first group. The third track would be for those that have featured on fewer investors’ radar, namely Egypt, Nigeria, Pakistan, Bangladesh, Iran and Vietnam.

The countries in this final group, notably Vietnam, Nigeria and Bangladesh, are quite different, but they all have interesting potential and merit investor attention. While only a couple of the N-11 have the potential to move into the very largest group of economies, the growth stories of them all are striking.

We looked at the G7 countries, the BRICs and the N-11, and tried to envision them in 2050. What we foresaw were the following groupings: a rich club with per capita incomes of $65,000 per annum or more, made up of Russia, South Korea and all the G7 except Italy; an upper-middle-income group with incomes between $40,000 and $65,000, comprising Italy, Mexico, China, Brazil and Turkey; a lower-middle-income group with incomes between $20,000 and $40,000, comprising Vietnam, Iran, Indonesia, Egypt, the Philippines and India; and finally a low-income group with incomes below $20,000, comprising Nigeria, Pakistan and Bangladesh. Thinking like this would help us, and, we hoped, investors and companies, to plan for the future, to see which regions of the world will be growing, how their wealth will advance, to what extent, and how their populations might behave as consumers.

 

 

 

In early 2011 I decided to further refine my view on the world’s most dynamic economies. In a paper jointly authored with my colleagues Anna Stupnytska and James Wrisdale, I published new research introducing the idea of “Growth Markets.”² Given the increasing importance of some of these economies, we set out to differentiate them from the traditional emerging-market universe. Growth Markets each account for at least 1 percent of global GDP, which means they have sufficient size and resources to really look after themselves, and importantly have a direct influence on the rest of us. Of the N-11 countries, we identified Indonesia, Mexico, South Korea and Turkey as already of sufficient size in terms of GDP and likely to see their own share of world GDP rise. I now believe these economies, along with the BRICs, should be described as “Growth Markets.”

Growth Markets are countries that we reckoned had the right demographics and productivity momentum to grow faster than the world average. They also had superior growth environments to most emerging markets, and the financial infrastructure, market size and depth required by international investors. They offered plenty of different, liquid investment opportunities.

N-11 countries that do not qualify today, such as Nigeria, the Philippines, Egypt and Iran, may become Growth Markets over time, as might others such as South Africa. Nigeria and the Philippines may grow to sufficient size by the mid-2040s, and Egypt by 2050. One of them may eventually take the place of South Korea, which could soon graduate to developed-market status. The Growth Markets concept is intended to help people see the importance of these economies, and to allay fears about doing business and investing in them.

The simplest way of demonstrating the power of the current Growth Market group is to consider their combined potential nominal GDP growth from 2010 to 2019: around $16 trillion, or between four and five times the increase in the United States. At least three-quarters of this is likely to come from the BRICs, with half coming from China. Growth in the other four combined will be equivalent to growth in the United States or the eurozone. It seems inappropriate and inopportune to keep thinking of these as emerging markets.

Despite some initial misconceptions in the media (see later), the Growth Market grouping was not an expansion of BRICs, but something quite different. My team and I felt that the “emerging markets” label no longer captured what was going on in key areas of the global economy.

 

 

 

The four BRICs and the N-11 all have large populations. Together they comprise close to 4 billion people, almost two-thirds of the world’s population. If they all do things to improve both their productivity and sustainable growth, then they will have a better future—which will be positive for the rest of us.

So what distinguishes all these economies from one another, and how should people think of them?

I have come to define a true BRIC-like economy as one that either is already 5 percent of global GDP or has the potential to be that big. Of the four BRICs only China currently satisfies this criterion, although Brazil is getting close now, and India and Russia are likely to achieve this in the next decade or soon after.

By contrast, the N-11 is a more diverse grouping. Some are quite advanced, others not. Indeed, seven are still too small, or not advancing rapidly enough, to be defined as anything other than traditional emerging markets. But it is feasible that some might make the leap one day to Growth Markets, if not to BRIC status.

The N-11 has established itself as a defined group in business circles, and is closely watched by investors. Some people seem to think we have created a deeply philosophical notion, but it was literally a phrase we thought up to describe simply eleven emerging nations that share one common factor: they have a lot of people.

I am occasionally embarrassed by how popular the N-11 concept has become. A number of events and investment ideas have recently focused on the idea. In March 2011 I was asked to attend a major annual conference held on the shores of Lake Como in Italy and to participate in a panel discussing the world economy as well as host a session on the Next Eleven, along with lots of important people from N-11 countries. Unfortunately I couldn’t participate as I was invited at short notice to attend another important event in China, but this high-level gathering was yet another indication of how both the N-11 and Growth Market concepts are fast becoming the focus of international interest.

 

 

 

Of the N-11, it seems that Indonesia, Mexico, Turkey and South Korea have the most justifiable gripe about not being accorded status equal to the BRICs, but, unwieldy acronym revision aside, none fully satisfies my elementary criteria.

When we introduced the N-11 idea, Mexico seemed the most obvious candidate for inclusion, since I had briefly considered it as a potential contender for the original BRIC group. With its sizable population, I thought it could feasibly become as large as Brazil or Russia by 2050. Now I realize that I was lucky not to include it in the BRICs. It is quite remarkable how modest Mexico’s GDP growth has been in the past decade, especially in view of its prowess as an oil producer and the rise in oil prices.

The policymakers of some of the Growth Markets also have aspirations for them to be part of the BRIC world, now that it has become a political club. Indonesia is an oft-discussed candidate. Its policymakers like to tell me about the country’s favorable demographics, its large, vibrant young population, its cycle of stronger growth, reasonably stable inflation and the rising wealth and aspirations of its citizens. By 2015 they believe their annual growth rate could rise to 9 percent, which would merit their inclusion alongside the BRICs.

But I would be impressed if it could continue with its current growth rate of 6 percent, with the bonus of steady inflation, never mind 9 percent. The Indonesian economy is currently only about half the size of Russia’s or India’s, and to become as big as the original BRICs it would need to boost its productivity considerably. It would have to grow dramatically to catch up with Russia in the immediate future, never mind the bigger BRICs, and I can’t see how it would meet my definition of reaching at least 5 percent of world GDP. But clearly Indonesia, along with the other Growth Markets, is becoming much more economically important to the world.

The size and wealth of economies and their growth potential, whether N-11 members or not, can become subjects of endless debate. I have ended up at a simple resting place when I get into these discussions. For any country beyond the original four to become a true BRIC, it needs to have a large population, evidence of strong growth and a strong GES. Without all three of these it will never have a large economy. Of the N-11, Bangladesh, Nigeria and Pakistan all have large populations, but low growth environment scores across most of the components—and they show little signs of dramatic growth.

Some of the other N-11 countries have high growth environment scores, but either smaller populations or a small base in terms of current GDP size. South Korea has a higher GES than both Germany and the United States, but it is unlikely to become as big as either because it doesn’t have enough people. Vietnam has a high GES but has an economy worth less than $100 billion.

 

 

 

Just before we published the paper explaining the concept of Growth Markets in early 2011, I had what I’d mistakenly thought was an off-the-record conversation with a journalist from the Financial Times. I woke the following day to read on the FT headline: “BRICs Creator Adds Newcomers to List.” I knew that the press in the four relevant N-11 countries would push to make something of it; sure enough, the following day most South Korean media outlets had the story and were calling and e-mailing for comment.

It was also suggested that Goldman Sachs, and I in particular, was trying to create fresh focus and attention in order to attract investment flows, and that my coining of the term “Growth Markets” was simply a marketing gimmick. The next day the FT’s Lex column noted that from the moment I coined the BRIC acronym until the world markets reached a peak in October 2007, the Morgan Stanley Capital International BRIC index, launched in 2005 to track shares in the BRIC markets, gained 625 percent in U.S.-dollar terms, compared to 499 percent for emerging markets and 74 percent for developed stocks. The obvious inference was that my classification had somehow influenced the markets, and that I was now trying to pull off a similar trick a decade later with a different quartet of countries.

But in coming up with Growth Markets, I was not trying ambitiously to identify a new investment strategy. I, along with my colleagues had simply concluded that it seemed an injustice, in economic terms, to still classify these four economies as “emerging.” As already noted, in the decade ahead their combined GDP will probably rise by around $16 trillion, beating the U.S. increase almost fivefold and doubling the contribution to world growth of the United States and the eurozone combined and they would soon be joined by others.

AFRICAN DREAMS

One popular idea has been to suggest that BRICs should in fact be BRICS, with the capital S for South Africa. Some argue it should be BRICA, with the A representing the African continent. As 2011 started, the S argument received a significant boost when it emerged that South Africa was being invited to the third annual meeting of the heads of state of the BRIC countries in Beijing. Some commentators believe South Africa is a natural member of BRICs, given its status as Africa’s largest, and one of its wealthiest, economies. It also has an important position as a large commodity producer and has maintained long-term trade linkages with some of the BRIC economies, notably Brazil and India. And of course South Africa is already a member of the G20.

I will explore the BRIC political club in a later chapter, but as far as economic criteria are concerned it is difficult for me to think of South Africa as a genuine BRIC. It is even difficult to think of South Africa as a Growth Market. It has very little chance of becoming anything like the size of these economies.

Although South Africa is currently Africa’s largest economy, it is only around $360 billion, some 0.5 percent of global GDP. It is about half the size of Indonesia or Turkey. Moreover, and in contrast to most of the N-11 economies, South Africa does not have strong demographics. Its population is less than 50 million. This is considerably lower than all the N-11 except South Korea (which would grow by another 20 million if the South ever unified with the North). South Africa’s unemployment rate in mid-2011 is 24 percent. It is hard to be big if you don’t have many people and such a high proportion of them aren’t working.

By suggesting that South Africa is not big enough to be a BRIC, I am not denying its regional importance. Indeed, the political argument for including South Africa in the BRIC might be that it is acting as a representative for the continent of Africa. (Whether other large African countries would see this as appropriate is another matter, but the rationale is understandable.) Africa as a continent is certainly large enough to be regarded as a BRIC: if you merely took the eleven largest African countries, they would be of equivalent size to India or Russia, and their combined 2050 potential is on a par. If a continent could be thought of as a country, then perhaps we can think of BRICA.

Of course, as is the case for all the BRIC and N-11 economies, there is a huge difference between potential and reality. This is where GES analytics are so useful. In Africa’s case, there needs to be considerable, and in some cases dramatic, improvement. In 2010 the average score for the African eleven economies was 3.8, a full 1 point below the average of the N-11 and BRIC economies. Some African countries have extremely low scores for reasons ranging from political instability to widespread corruption, weak or draconian governance, low educational standards and limited use of technology.

Unless these scores increase, then the potential for the continent will remain just that: potential. Very few successful economies have such low scores. The two current largest of the BRIC economies, Brazil and China, score well above 5. While these scores are not high enough for either of them to reach their full potential, they are in a much better place than most African countries.

In principle, boosting their GES shouldn’t be excessively difficult if African leaders were to adopt the best practices of the likes of Brazil and South Korea. Formal inflation targeting would be an easy yet powerful strategy to pursue, as South Africa did some years ago. Giving such importance to low and stable inflation is a clear sign of transparency, something that is itself necessary in so many of these economies.

As far as the micro variables are concerned, the required steps here are even more important and perhaps trickier for some African countries—given their short independent histories and poor track record of governance. African leaders should eagerly target improvements in some of these variables in order to bring about the progress their populations crave and need: better education, improved health care to extend life expectancy, the use of mobiles and computers, and more stable and predictable forms of governance.

 

 

 

Demography is destiny, goes the saying, which if true makes Africa an even hotter prospect. In 2011 the United Nations published its revised estimates for the world’s population in 2100. Asia will be home to 60 percent of the world’s population, as it is today. But Africa will swell. Between 1975 and 2000, it grew from 416 to 811 million. By 2025, it will reach 1.4 billion and by 2100 a remarkable 2.2 billion. In addition to Africa’s well-known population giants, Nigeria, Ethiopia and Congo, Tanzania is expected to grow to 138 million by 2050, Kenya from 47 to 59 million and Uganda may exceed 100 million.

The greatest challenges to Africa’s growth may come from its growth environment scores. The average for the BRICs is 4.9, for the N-11 it is 4.7, but, as mentioned above, the very top eleven African countries average just 3.8 and for Africa as a whole it is a low 3.5. Morocco (5.5), Egypt (4.2) and South Africa (4.9) are toward the top, with countries like Zimbabwe (2.9) and Congo (1.7) at the bottom. Overall, the African countries lurk near the bottom of our 180-country GES ranking and need to make a lot more progress across the board if they are to achieve their economic potential.

Nigeria, though, has shown what can be done. I recently bumped into the country’s finance minister, Segun Aganga, who worked for Goldman Sachs’ capital markets team until 2010. To my delight, he had with him Nigeria’s growth environment scores. He told me that he was planning a marketing campaign around Nigeria’s ambition to be twentieth on the world GES chart by 2020.

Nigeria is critical to Africa with around 20 percent of the continent’s population. Aganga’s aspirations for the country make me really excited about where Africa’s most populous economy can get to in the future. By 2100, Nigeria’s population could well be bigger than that of the United States. It has a group of politicians who seem determined to weed out the terrible corruption that has restricted its growth for so long. And, while its GES is the third lowest of the N-11 group, it has nearly doubled in the last thirteen years. A repeat of this over the next thirteen would have Nigeria well on its way to delivering its potential.

In this it will be aided by the technological leaps that are now possible. All over Africa, mobile wireless technology is enabling the rapid development of basic services like education and banking. If this continues and expands, countries like Nigeria may be able to grow at an unprecedented rate, skipping once necessary stages of development. This could be a very positive story in the years to come, and is yet another reminder that the world is about far more than stumbling growth in the United States and Western Europe.

Even small improvements in the growth environment can have an enormous impact on a country’s growth trajectory, and we estimated that Nigeria’s efforts had helped lift its growth rate by 2 percent. If it could raise its GES to best-in-class levels, it could raise this growth rate by another 4 percent, a massive premium. Of course, there are many variables at work here, but the important point is that the rise of Africa’s middle class, when coupled with greater transparency and openness, and an improved environment for economic growth, could lead to one of the great economic stories in the coming years.

 

 

 

Remarkable events were unfolding in Egypt as I wrote this book. Within a little over two weeks President Mubarak was forced to stand down as the nation’s leader. What appeared to start as a “copycat” protest following unrest in Tunisia quickly turned into an uprising of the Egyptian people to reject decades of imposed governance and seemingly demanding a life of more opportunity, hope and perhaps democracy.

Quite where the nation will go is extremely unpredictable, and the answer is likely to be crucial on many fronts, especially given its historical role in the Middle East’s security issues. Here is the Arab world’s most populous country having a revolt, if not a revolution. No sign of American flags being burned or anti-Western protest. On the contrary, lots of the most common signs from the protests are that Egyptian people, now having access to the Internet and mobile phones, have suddenly seen what so many others have, and they want it for themselves. They are also agitated by high food prices, lack of employment, crumbling infrastructure and an over-bureaucratic state. It was the Internet and mobile phones—social media—that gave them quick access to what was happening in Tunisia, to network and galvanize quickly around a common cause or to find common cause through online discussions.

When the uprising occurred in Egypt in January 2011, I looked immediately to its growth environment. Egypt is an N-11 country, a nation of 80 million people. Its economy is only around $200 billion, so it is not one of the larger or wealthier N-11 nations. It has vast potential and what happens here is likely to be instrumental for much of North Africa and the Middle East. Egypt’s GES of 4.22 ranked it eighth out of the N-11, just above Nigeria, Bangladesh and Pakistan. Over the previous decade, it had scarcely improved. Its macro scores, such as government debt and its fiscal position, were poor, as were micro scores such as use of technology and political stability. Watching the protestors on television, it was not hard to understand their frustration at years of economic stagnation.

As risk premiums rose in financial markets all over the world, as people worried about these uprisings spreading throughout the Middle East and affecting the price of oil, my thought was that if these events end up improving Egypt’s growth environment, and thus the well-being of its people, then it will have been worth it.

In Egypt, for example, the growth environment scores have been so low for so long that it did not surprise me when the people eventually said enough and demanded new leadership. The spread of technology means they can easily see what has happened in China over the last few years—the quadrupling of wealth—and demand it for themselves. I tend to see most political and economic events through these scores. If a new regime can deliver more accountability of leadership and more opportunity for its people, then this could be an extremely positive development. Not just for Egypt, but for the whole region.

BE BIG OR BE WEALTHY?

I’ve often thought that many Western observers are “scared” of the potential of the BRIC and N-11 countries, believing that their growth might be at the expense of their own country’s success. This is not the case. Not only is their potential just that—potential—but their success, if it occurs, is likely to be good for everyone else.

It’s easy to forget that the BRIC countries have to raise their growth environment scores and productivity in order for their potential to be actually achieved. When they do so, I have sufficient faith in economics to believe that international trade is a win-win situation for us all, at least in the aggregate. It is the basic yet critical tenet of international trade that countries specialize in their net advantages, and through this, trade with each other. International trade benefits all. The emergence of the BRIC countries—and the N-11—is boosting global trade in a dramatic way, and as a result helping the rest of the world.

It is equally important to remember that there is a difference between wealth and size. The United States is the biggest economy in the world today and has been for decades. But in terms of wealth per capita, it is not the richest. Bermuda, Luxembourg, Switzerland and most of the Scandinavian countries are all considerably richer than the United States. The United States becoming bigger doesn’t threaten those countries’ wealth. In fact, because of international trade, as the United States has grown it has helped those countries to become wealthier. The same is true as a result of the emergence of China, the rest of the BRICs and the broader world.

Looking at the world’s most populous nations in terms of future wealth, rather than overall GDP, not many of today’s big developing countries are likely to become anywhere near as wealthy as those in the so-called developed world. Russia, from the BRICs, ironically, does have the chance to be in the wealthier nations, possibly becoming as wealthy as the larger European economies. Of the Next Eleven, South Korea and Mexico could conceivably rise to be among the top ten wealthiest countries in the world if they achieve their potential.

None of the others is likely to come close to the wealth enjoyed by today’s most wealthy nations, although a number could attain levels of GDP per capita similar to those achieved in some of them. China will probably become an exceptionally large economy by 2050, not far off double that of the United States, but its wealth is likely to be just half. India will only represent a quarter of the wealth of the United States, at best.

THE RISE OF GROWTH MARKETS

A simple glance at the performance of Germany in recent years is a powerful example of the positive forces that can be unleashed by the rise of the Growth Markets. Since Germany is a large exporting nation, the growth of world trade is critical to its prosperity, and its exports to some of the BRIC countries are rising dramatically. German exports to the four BRICs have already become bigger than its exports to France; at the time of this writing, China looks set to become its third largest market within a few months. If sustained close to this pace for another couple of years, it would lead to German trade with China being bigger than German trade with France, a quite remarkable development given those two nations’ close proximity and modern history.

Many people still argue that these nations are not the growth engines that I claim. They say I could have used the same arguments at any time in history, and their emergence as major successful economies still hasn’t happened. But, as I have already explained, we did test the BRIC models back to fifty years ago—and we saw that many Asian economies ended up bigger than the model would have predicted.

A major goal for all the BRIC and N-11 countries must be to undertake policies to raise their GES to South Korea–like levels. If they do, the dramatic 2050 scenarios are going to be achieved. South Korea has growth environment scores better than all the G7 countries except Canada. If the rest of the growth economies achieved these levels, then I am sure we would all be better off.

 

 

 

In addition to the critical policies each BRIC nation will individually need to introduce, there is one common variable that suggests the next fifty years are to be more supportive for their economies than the last: technology. New developments in communications mean the world is going through another dramatic phase of globalization, where national economic borders are being eroded and countries can easily participate in global business and markets. This is especially new for China and Russia, which entered the world economy as recently as the 1980s. China’s and Russia’s self-imposed postwar exile in terms of Western ideas and economic policies is over, and 1.3 billion Chinese and 140 million Russians have joined the rest of us in consumer society.

German Exports Since 2007

Source: Haver Analytics, Goldman Sachs calculations

 

Witness Manchester United’s reported 70 million Chinese website members, the thriving McDonald’s restaurants and fashionable clothing stores in the major cities of both countries and the huge expansion of luxury goods sales both in the BRIC countries and to BRIC tourists in the West.

China’s appearance on the international stage has been highly important for others. Take India: some critical domestic factors offer India a brighter future, but China’s remarkable success has made many Indian policymakers sit up and engage more widely with the world economy.

China’s success has similarly stimulated some of the N-11 economies: hence why I am so optimistic about the world’s future. The growth economies are raising their potential and also ours. Proactive engagement in international trade has been a hugely positive force for each of the BRIC nations in the past decade, as has the adoption of best economic practice from Western macro policies (perhaps more questionable since the global credit crisis). Just look at the way inflation targeting has transformed Brazil.

With so many people now rising up the economic ranks, from poverty toward middle-class incomes and lifestyles, the planet’s resources are coming under unprecedented strain, and it is to this aspect of global growth that I turn next.