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Emerging markets: The "Per Capita Problem"

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With emerging markets growing more slowly, supply chain managers will have to rethink their strategies for serving those markets.

The hype surrounding emerging markets that was prevalent in the 2000s seems to be winding down, much like Arab oil money in the 1970s, Japanese productivity of the late 1980s, and the "dotcom" bubble of the late 1990s. The claim that emerging markets were somehow destined to catch up to the United States has become questionable as these once booming economies enter the next phase of economic growth.

With the global economy struggling to regain traction, many emerging market economies are learning the hard way that they must deal with their own domestic political and economic obstacles to growth if they are to advance economically. Moreover, given that emerging markets are growing more slowly and are unlikely to reach the level of development of mature markets in the mid-term, supply chain managers will have to rethink their strategies for serving those markets.

Article Figures
[Figure 1] Sluggish GDP growth in developing markets
[Figure 1] Sluggish GDP growth in developing markets Enlarge this image

The real GDP (gross domestic product) growth rate in the BRIC countries (Brazil, Russia, India, and China) has slowed considerably compared to the rate seen in the previous decade. Brazil's real GDP growth rate was just 1 percent in 2012, compared to an annual average of almost 4 percent from 2000 through 2008. According to IHS Global Insight, Russia's real GDP growth rate is likely to be 3.2 percent for the whole of 2013, with Russia's economic well-being more or less tied to the world's volatile oil markets. In the near term, moreover, Brazil and Russia, as well as a few other emerging markets outside of BRIC, are likely to grow at a similarly sluggish pace as the United States. (See Figure 1.)

A major indicator of this situation is that equity markets for emerging economies have trended downward over the past few years because expectations regarding economic growth have not been realized. While the Dow Jones Industrial Average (an index of stock performance among 30 leading U.S. companies) is breaking new records, the eurozone is entering deeper into recession. It is becoming clear that although the U.S. economy is still struggling to regain its growth momentum, it is probably the "prettiest pig at the fair"—in other words, the best of a group of somewhat unattractive options.

A tale of two countries
India and China have long been held up as examples of large, fast-growing economies, yet even they are faltering in some respects. India's real GDP growth rate is likely to be in the 5-percent to 6-percent range this year, after growing between 8 percent and 10 percent from 2003 to 2007. A growth rate of 5 percent will be considered stellar compared to recent U.S. growth rates or the recent performance of European economies. However, India's GDP per capita currently stands at US $1,500; contrast that with GDP per capita of US $49,600 in the United States and US $6,100 in China. India therefore is likely to experience what economists call the "Per Capita Problem": Any slowdown in an emerging market economy with low income or low GDP per capita will feel like a recession.

India's economy has made significant progress over the past couple of decades, yet a certain level of gloom has entered the national mindset since economic growth started to slow. The implication is that India's income per capita will not close the gap with China anytime soon. This could have significant consequences for India's population. Many economists believe that unless a country has a sufficient level of per-capita income before growth rates start slowing to levels approaching those of developed economies, declining growth will hinder the standard of living, especially if population growth is relatively strong.

China's outlook is somewhat stronger. Real GDP growth has averaged about 10 percent per year over the past 30 years, but even the Chinese Communist Party is now predicting slower growth in the range of 7 percent to 8 percent in the coming years. However, Chinese GDP per capita is more than four times that of India. In addition, China does not have India's low urbanization rates, extreme poverty levels, and strong population growth (India is expected to surpass China as the most populous nation by 2021).

Indeed, the People's Republic of China is the one emerging market that still seems promising. Still, certain economic questions loom large. According to several unofficial sources, total Chinese debt is anywhere from 150 percent to 200 percent of GDP; contrast that with the U.S. debt-to-GDP ratio of 300 percent to 350 percent. Additionally, China can no longer depend on getting as much GDP growth from issuing debt as it did 10 years ago.

As many emerging economies look inward for growth opportunities, they are finding that those opportunities are hard to come by. Most economies have a relatively high consumer-spending-to-GDP ratio; with very few exceptions, that ratio is expected to either be flat or decline over the next eight years. For BRIC as a whole it is expected to decline from 45 percent to 44 percent, while Chinese consumer spending is expected to gain share in GDP, up from 33 percent in 2010 to 37 percent in 2020. China can therefore look to its domestic consumers to help maintain GDP growth.

U.S. economy: Not so bad after all?
As the emerging market boom starts winding down and the eurozone digs deeper into recession territory, an interesting idea has emerged: In terms of economic performance, the United States is looking better than expected. The U.S. economy has its problems, but the country also has many positives that separate it from the economic and demographic woes of Japan and Europe.

Europe and Japan are losing their shares of global GDP. Emerging markets are losing steam, with most of the emerging market growth expected to come from China. What is surprising is that the United States has maintained and is expected to hold onto its share of global GDP. The underlying economic and demographic fundamentals of the U.S. economy are expected to continue to sustain that country's lead in the key areas of research and development as well as technological advances and their commercialization, and thus provide for a productive economy that can sustain continued economic growth.

For supply chain managers, the implications of these shifting growth patterns are significant. As the growth rate in emerging markets continues to slow, companies will have to readjust their supply chains from "growth" mode to "maintenance." It's likely, therefore, that supply chain managers will focus their efforts mostly on boosting efficiency rather than on growing revenue. They may also have to compensate for the slowing growth in emerging markets by capitalizing on the resiliency of the U.S. market.

Chris G. Christopher, Jr., Ph.D., CBE is executive director of the U.S. Macro and Global Economics practice at the research and analysis firm IHS Markit. Samuel Champanhet is an economist for IHS Global Insight's Global Consumer Markets team.

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