The Good Emerging Market Shock That’s on the Way

September 22, 2015

The coming boom in middle-class consumption in key emerging markets can create new opportunities for growth and employment around the globe

By Yuwa Hedrick-Wong

If you’ve been paying attention to any news about the economy in the past few weeks, you’ve probably wondered whether developments out of China mean that all the buzz about emerging markets we heard in the last decade or so was just so much hype.

Not so fast. In the next decade, we’re going to see a population from emerging markets join the global middle class that will be more than one-and-a-half times the size of the entire current population of the United States. And, in case you’re thinking that’s too optimistic, it’s actually not: it’s based on conservative projections for GDP growth (4% per year in the coming decade in China, for example).

What this means is an increase in middle-class demand of $9.1 trillion between 2015 and 2025 in eight of the biggest emerging markets. But the vast bulk of it—90%, in fact—will be concentrated in three countries: Indonesia, India and, yes, China. While we’ve been talking about the unpleasant shock of the last few weeks, we could be talking about a shock of a different kind—let’s call it the coming-demand shock of the next decade. Unlike the most recent shock, this is one to be welcomed for its potential to contribute to global inclusive growth and new economic opportunity.

What’s driving it?

In essence, we’ve reached a turning point in the industrialization of the emerging markets covered in this data. It’s the point at which GDP has risen enough in these markets that mass, labor-intensive manufacturing is going to deliver fewer and fewer benefits—simply because there’s less and less of the low-wage labor that makes this economical. That’s true of China and of all other emerging markets in this data, with the exception of India.

So, strong economic growth in these economies will need to be supported by robust domestic demand—a mass consumer market that can create lots of jobs, in which the service sector becomes the key driver of growth. That can come about only when there is a bulk in the middle class.

Why this is a good shock, for both developing and developed markets

The growth in middle-class demand in these emerging markets has huge global implications for economic activity in both developing and developed economies. It’s fairly easy to imagine how this might play out in developing countries that are in an earlier stage of industrialization than, say, China: they would be able to take on an increasing share of manufacturing as low-wage labor in China comes into increasingly short supply. But it’s not just developing countries with conditions favorable to manufacturing that can gain employment opportunities from this demand shock.

If developed economies can attract tourists from the new emerging middle class, that will create a variety of employment opportunities that are important for inclusive economic growth—think people working in restaurants, transportation and retail, for example.

This coming demand shock would also benefit economic activity in developed economies. Don’t forget that the service economy is incredibly complex; it involves, for example, marketing services, which provide high-level expertise in branding. That means opportunities exist for global Western companies in China and other emerging markets that never existed before. For instance, think of what it could mean for big US and UK architectural firms if a middle class consisting of hundreds of millions of people start demanding unique home stylings.

What policymakers can do to ensure even greater global growth

Again, all of those possibilities are based on conservative estimates of what the demand shock will be, as opposed to what it could be. There could be an even more significant expansion of this global middle class if people were enabled to start their own businesses, especially if those businesses offered better-paying jobs that serve and sustain middle-class demand.

One way to start is by looking at measures that improve the ease of doing business, and offering better recognition and protection of property rights for micro-entrepreneurs, which would allow them to create bankable assets they can use. That in turn requires financial inclusion—that is, financial services that are universally available. These can all lead to more widespread, and better, inclusive growth, with a powerful ripple effect.

Good emerging market shock

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