(by the numbers anyway) to be demographic weaknesses. Thus, favourable demographics will never be directly correlated to future growth. It would be unwise and simplistic, for example, to conclude that Nigeria has a brighter economic future than Japan because of its relatively young population.
That said, the fact remains that strong demographics have an extremely high correlation with rising incomes and urbanisation, where low productivity agrarian work is substituted for more productive endeavours in technology and industry.
More so than anywhere else, the sheer power of demographics is on full display in the nations of China and India. A report by consulting firm McKinsey titled ‘Winning the $30 Trillion Decathlon’ points to several mind-blowing figures regarding these two emerging economies. In the first industrial revolution, they note that it took Great Britain approximately 150 years to double their GDP per person. The second industrial revolution, which took place in the United States, required 50 years to double GDP per person. In both cases the two countries started out with a population of around 10 million. The latest revolution in China and India, which started in the late 1980s, took 12 to 16 years to double GDP per person, with a population of close to a billion. The numbers speak for themselves. The latest revolution was a thousand times stronger than the first industrial revolution and it’s just getting started.
In that same report, McKinsey states that in 1990 there were roughly 1 billion people around the world earning more than $10 per day, with the bulk of those people residing within the US, Europe and Japan. Over the last 20 years, however, the progress of urbanisation and market-friendly trade policies, including membership to the World Trade Organization (WTO), has caused that number to double to 2 billion people, with the expansion coming predominantly from emerging markets.
Projections by McKinsey suggest that by 2025 this number will swell to 4.2 billion people, on the back of emerging market growth. The same study projects that consumption will rise to $30 trillion annually (MGI Research), up from 12 trillion in 2010. In 15 years, it is projected that 60% of 1 billion households will earn more than $20,000 per year and most of them will be living in emerging market countries.
Projections like this can seem almost like an abstraction, like they will never come to fruition. But consider the analysts who, several decades ago, predicted that China’s consumer economy would one day trump that of the United States. That is no longer an abstract idea or prediction, it’s already happened. Other statistics that would have seemed absurd a decade ago are now reality. Consider that:
China has already overtaken the United States as the largest consumer market in the world.
Half of the world’s global internet users are in emerging markets.
Brazil’s social networking usage is the second highest in the world.
15 cities in Africa have 60% ownership of internet capable smartphones.
While surprising to many, those who understand the nature of demographics will not be shocked by these current developments, nor developments predicted for the near-term future. Over the next 15 years, for instance, it is estimated by McKinsey that 440 emerging market cities will generate about half of global GDP and 40% of global consumption. During that timeframe, it’s expected that 65 million people – the equivalent of the combined population of London, New York and Tokyo – will move into the cities every year. Again, this is just the beginning.
Demographic factors
When demographics are examined in the upcoming chapters, the focus will be towards:
Growth in population
A large and growing population has several distinct advantages in the emerging market context. It means more workers, increased consumption, increased national savings, a big domestic market, increased economies of scale, and a catalyst for generating new ideas to improve productivity. We view a young and growing population as one of the necessities to sustain economic growth in the long run.
Average age
Emerging markets that are expected to reap demographic dividends have an average age between 25 to 30. When a country has an average age of 30 to 35 the population is considered to be in its prime working years and as the average age gets closer to 40 an emerging market moves beyond a stage where it can reap a demographic dividend. Therefore countries with large populations with an average age between 25 to 30 have an edge over other countries with smaller populations or higher average ages.
Dependency ratio
The dependency ratio is defined as the ratio of non-working people to working people. The greater the dependency ratio, the greater the burden on an average working adult. A low dependency ratio means there is a large pool of young working adults capable of supporting the dependent population. This means there is higher tax revenue and lower spending for the government, which in turn means less pressure on government finances.
Rate of migration to cities
Increased migration to cities is a sign of growing economic opportunities in urban areas and a transition from an agrarian economy to an industrial base. Historically, migration to cities has resulted in better distribution of wealth and narrower income gaps. As the world becomes a service-oriented economy, there will be rapid urbanisation and more people migrating to cities to take advantage of new economic opportunities.
Unemployment projection
This metric helps us understand whether job creation is growing at a quicker pace than the rate at which a country’s youth are entering the workforce. It also helps us achieve an understanding of whether the young adults graduating from education have the skills necessary to be employable in the modern workplace.
2. Economic conditions
Economic and fiscal conditions are the building blocks of any economy. While it is useful to evaluate economic conditions based on top-line GDP numbers, there are other ways to evaluate a nation’s economic conditions, including debt rates, savings rates, inflation and overall competitiveness. Criteria such as these help one determine whether a nation’s growth is sustainable, whether the growth is driven by exports or by internal consumption, and how well the economy is responding to changes.
Many emerging market economies are currently transitioning away from high growth rates based on the export of goods and services (on the backs of cheap labour) to a more balanced rate of growth based on innovation and internal demand. China, Brazil and Indonesia are likely to be great illustrations of such a transition.
In the past, emerging markets have – almost without exception – experienced untold misery because of extremely high inflation rates. For nations with higher than normal savings rates (again, true for almost all emerging market nations) this robs savers of their purchasing power and causes great stress for the aspiring middle class. Today, we see these nations adopting policies to prevent such occurrences from happening, along with a focus on managing deficits and curtailing subsidies.
Despite some challenges, emerging markets have shown they can produce 3% to 4% higher growth rates than developed markets and there is a high likelihood that these advantages can be sustained.
Economic factors
The
