Why do some countries grow faster than others, year after year? Why do China and South Korea grow rapidly while a large group of countries in Africa and Latin America remain underdeveloped? Nobel Prize-winning economist Robert Lucas famously wrote that “the consequences for human welfare involved in questions like these are simply staggering”. Once a trained mind starts to think about such questions, he suggested, “it is hard to think about anything else”. When it arrives, economic growth can transform the lives of millions of people.
It’s no surprise, then, that McKinsey Global Institute’s Jeongmin Seong – raised in South Korea in the latter years of its “Miracle on the Han River” and now living in China to pursue his career– would want to understand the growth of nations.
After live aid
Seong and ten McKinsey colleagues authored the McKinsey Global Institute’s recent report on global growth factors titled Outperformers: High-growth emerging economies and the companies that propel them. Their study identifies a group of seven long-term outperformers with a record of 3.5 per cent annual growth sustained over 50 years. These are the familiar success stories of East Asia: China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, and Thailand.
But here’s a story that most people have not heard. A second band of nations stretching across South Asia and into Europe and Africa has achieved 5.0 per cent annual growth over the past 20 years. This group is mostly made up of far less familiar names: India and Vietnam, yes, but also Azerbaijan, Belarus, Cambodia, Ethiopia, Kazakhstan, Laos, Myanmar, Turkmenistan, and Uzbekistan.
Take Ethiopia, a country of 107 million people, for example. Three decades ago it was a by-word for famine, the focus of the famous Live Aid concert. Today, while still relatively underdeveloped, Ethiopia is growing fast on the back of not only traditional agricultural industries like coffee production, but also new fields like flower production. Industries nationalised in the 1970s have been moved back to the private sector. Fashion brands H&M, Guess, and J Crew manufacture in the country. Growth in per capita GDP hasn’t dropped below a rate of 5.0 per cent since 2002.
And while most westerners may not be able to point to Kazakhstan, Turkmenistan, or Uzbekistan on a map, the economies of these Silk Road nations have roared back to prosperity since the tough post-Soviet 1990s. Uzbekistan, for instance, has posted annual GDP growth of more than 8 per cent in most of the past 10 years. Such stretches of high growth transform the lives of millions. Seong and his McKinsey colleagues believes that these outperformers, like the “Asian Tigers” before them, have initiated a virtuous cycle of growth: higher national productivity leading to higher incomes and then to higher consumer demand.
Encouraging growth
Governments can foster such a cycle through several key policies, Seong says.
Fostering savings helps to build infrastructure and other capital stock. A decade ago, China’s gross saving rate topped 50 per cent, and it’s still above 45 per cent. Some of the outperforming economies have even resorted to forcing their population to save, he notes, through devices such as the mandatory pension schemes run by Singapore’s Central Provident Fund.
Competition policy pushes companies to vie with strong rivals and often removes arrangements like licences and government monopoly ownership. State monopolies are privatised over time. “Certain economies tend to think they need to focus their resources to support one or two sectors that can act as global champions,” notes Seong.
But McKinsey’s work shows that productivity within sectors matters far more than choosing the right sectors to be in. As Seong puts it, “One or two sectors are not big enough to save the country.”
Innovation and export promotion stressing achievement enhances performance. Many outperformers do use subsidies, but Seong says the outperforming nations tend to tie them to performance goals.
“You have to hit a particular level or you don’t get the subsidy. Then governments in outperformers tend to phase subsidies out gradually to create competitive pressure that enhances performance.”
Growth outside home markets is encouraged. For instance, Ethiopian Airlines has expanded through acquisition to become Africa’s largest airline company by both revenue and profit.
Building institutional capability helps nations excel. Several outperformers have built their governments’ capabilities by adopting a culture of constant learning including sending government officials overseas to learn about best practices, notes Seong. They have also invited overseas experts to their countries and listened to their advice, seeking to learn from other countries’ experiences and adapt them locally.
Maintaining the virtuous cycle of growth takes effort, Seong stresses. Nations must not allow income inequality to grow too much, nor innovation to dwindle.
The role of large and competitive firms
McKinsey’s research has confirmed that large companies foster this virtuous cycle. In South Korea, for instance, chaebol – industrial groupings led by Samsung, Hyundai and LG – account for a huge chunk of the economy, notes Seong. They have sped up the nation’s economic growth by building the supply chains of other South Korean firms, investing in innovation, taking risks, and breaking into global markets.
Yet outperforming economies enabled such high-performing firms by creating substantial competitive pressure in which leading companies need to fight to thrive.
To illustrate this point, McKinsey’s researchers calculated the probability that a company in the top quintile of profit generation would still be there a decade later. In outperformer economies, this number was just 45 per cent, substantially lower than the 62 per cent figure for high-income economies. “If they win, they win big,” notes Seong of companies in the outperformer group. “And if they fail, they fail big.”
The next wave
How will the next wave of outperformers grow? Seong suggests that just as the United States and Europe have provided markets for exports from China and other Asian economies, China has begun playing that role for emerging economies. The growth of China’s consumption from 2015 to 2030, he notes, could be as large as that of the United States and Europe combined.
According to a McKinsey Global Institute report, China and the World, co-authored by Seong and released this month, “By 2030, 58 percent of Chinese households are likely to be in the mass-affluent category or above (defined as household disposable income being 18,000 renminbi or more a month).”
It goes on to say, “The spending profile of urban Chinese consumers is converging with that of their counterparts in cities around the world.”
Bangladesh, Cambodia, and Vietnam have been capturing export share from China in labour-intensive industries, he notes. Risks remain for these countries. Among them is “premature deindustrialisation” –automation could mean that tasks that once moved to low-wage countries may instead stay in higher-wage nations, eroding the traditional development path.
Nevertheless, Seong says that opportunities are still there for the next generation of outperformers as long as they can find their way to that virtuous cycle.
“The door is not closed,” he says.
This article appeared first in The Mandarin.