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Finlayson: Emerging markets the defining characteristic of our age

October 3, 2012 (Vancouver, BC) - At a time of slowing global growth and considerable uncertainty about the economic outlook, it is easy to lose sight of the longer-term trends that are re-defining the international marketplace. The most far-reaching such trend is the rise of emerging markets in the world economy.

Emerging economies include all of Africa and Latin America, and Asia apart from Japan, Singapore, South Korea, Australia and New Zealand. Most of the states that comprised the former Soviet Union are also classified as emerging economies, along with Turkey and the Middle East (except Israel).

Emerging markets currently account for 45% of world consumption – a proportion that continues to edge higher – and they have driven the lion’s share of global economic growth for the past decade. By 2030, upwards of 60% of total world-wide spending will be occurring in countries now labeled as emerging markets.

China, India and some other emerging economies have lost momentum in 2012, but over the medium-term they will continue to outpace the advanced economies in top-line growth. Most Western countries are saddled with excessive private and public sector debts after an extended credit binge over the two decades preceding the 2008-09 financial crisis. As the US, Japan and much of Europe address their debt addiction, the resulting de-leveraging process coupled with government fiscal austerity will weigh on their future economic growth rates. In contrast, most emerging economies are less reliant on debt to sustain private consumption and to pay for public services.

Many rich economies are also grappling with a second factor that will constrain economic growth: aging populations, of which one element is a deceleration in the pace at which their workforces will be expanding. Since “labour input” is a principal ingredient in GDP growth, this too, promises to dampen economic dynamism and limit gains in living standards in much of the West. Although some emerging markets are also aging, the process is less advanced in the developing world, and most emerging economies have more attractive demographic profiles than the West. The specter of increasingly unaffordable “welfare states” is a phenomenon known mainly in mature industrial countries; it is not yet an issue in the emerging world, with the exception of Russia, although as they grow richer, more developing economies can be expected to boost spending on social programs.

Another important trend that is also helping to spur growth in the emerging world is urbanization. A recent study from the McKinsey Global Institute observes that the world is witnessing a dramatic transformation, “as the populations of cities in emerging markets expand and see their incomes rise as never before, producing massive geopolitical shifts and a wave of new consumers whose spending power will change the way the world shops and invests.”

According to McKinsey’s number-crunchers, today 600 urban centres generate three fifths of global output. In future, not only will many more of these big cities be found in emerging markets, but the latter will be home to almost all of the world’s fastest growing urban communities. By 2025, 99 new cities will join the top 600, all from emerging markets, while a like number of developed world cities will drop off the list. McKinsey estimates that urbanization in China is happening at 100 times the scale and ten times the pace of the first Western nation to undergo urbanization, Britain.

The net result of all of this is that developing countries are moving up the league tables in overall economic size and market clout. The accompanying table lists the world’s ten largest economies in 2010, and projections for 2030 from Citibank. Note that the figures for gross domestic product are stated in US dollars, and are based on Citibank’s estimates of “purchasing power parity” exchange rates – which adjust for the varying cost of living in different countries. Using this metric, in 2010 four of the biggest ten economies were from the emerging world; by 2030 six of the top ten – and four of the leading six – will be emerging economies, with China overtaking the United States to occupy first place.

The relative and absolute rise of emerging markets is the defining characteristic of our age. Canadians need to pay close attention to the shifting patterns of global economic influence in order to ensure that our country is positioned to benefit from this historic development.

The World’s Top Ten Economies, 2010 and 2030
(GDP measured in trillions of US dollars
using purchasing power parity exchange rates)

2010 GDP 2030 GDP
US $14.12 China $38.49
China $9.98 US $24.62
Japan $4.33 India $23.27
India $3.92 Japan $5.55
Germany $2.91 Brazil $5.28
Russia $2.20 Russia $4.82
Brazil $2.16 Indonesia $4.28
UK $2.16 Germany $4.05
France $2.12 UK $3.67
Italy $1.75 Mexico $3.20


As posted on Troy Media