October 17th, 2018

Outperformers: High-growth emerging economies and the companies that propel themANU MADGAVKAR | PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS | WASHINGTON DC

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Rated #1 Think Tank 2016 (private sector category) by the Global Think Tank Index, University of Pennsylvania

2McKinsey & Company

Eighteen emerging economies sustained growth higher than the advanced economies over long periods of time.

18 Outperformers surpassed high-income economy growth rates of GDP per capita over long periods of time

11 achieved >5%p.a. over 20 years

7 achieved >3.5% p.a. over 50 years

Long-term outperformersOutpaced US growth consistently from 1965–2016

▪ China▪ Hong Kong▪ South Korea▪ Singapore▪ Malaysia ▪ Indonesia▪ Thailand

Recent outperformersOutpaced US growth consistently from 1996–2016

▪ India▪ Vietnam▪ Cambodia▪ Laos▪ Myanmar▪ Azerbaijan▪ Belarus▪ Kazakhstan▪ Turkmenistan▪ Uzbekistan▪ Ethiopia

3McKinsey & Company

Most emerging economies showed low or inconsistent improvement relative to advanced economies, and a few lagged advanced economy growth rates over 50 years.

Underperformers (select examples)Slower relative growth than the US from 1965–2016RussiaSouth AfricaUkraineVenezuelaZimbabwe

Middlers (select examples)No or inconsistent improvement relative to the US from 1965–2016Very recent acceleratorsBangladeshGhanaPolandPhilippinesPeruRwanda

Consistent growersChileColombiaCzech RepublicEgyptHungaryMorocco

Volatile growersArgentinaBrazil IranKenyaMexicoNigeriaParaguay

4McKinsey & Company

7.3 13 19China

GDP per capita growth among outperforming economies has far exceeded that of other emerging economies.

GDP per capita Index: 100 = 1965 Archetype

CAGR,1965–2016%

GDP2016% share

Popu-lation,2016% share

1,500

3,000

3,500

2,500

500

4,000

0

1,000

2,000

1965 70 75 80 2016200085 90 95 05 10

6.0(‘96-‘16)

4 22Recentoutperformers (e.g. India, Vietnam)

2.0 59 13High income

4.7 5 6Long-term outperformers (e.g. Indonesia, Malaysia)

1.7 16 31Other emerging economies

5McKinsey & Company

Sustained, highGDP per capita

growth

A pro-growth agenda of productivity, income, and demand propelled the outperforming economies.

Higher productivity

▪ Capital accumulation added

~60% of total growth in

Outperformers or 4–5 pp of per capita GDP growth each year

▪ Total factor productivity added

~25% of total growth in

Outperformers or 1-4 pp of per capita GDP growth each year

Strong and inclusive income growth

▪ 4–5 pp higher annual wage growth and….

▪ 2–5 pp higher annual net income growth of large firms

…compared to other emerging and high income economies

Boosting demand

▪ ~3 pp higher annual consumption growth than other emerging economies

▪ Achieved ~30% share of global goods trade and ~25% of global services trade

6McKinsey & Company

Outperformers have adopted pro-growth mindsets and approaches through a variety of ways.

▪ Singapore, South Korea, Hong Kong in the top 5 on ease of doing business

▪ Indonesia and China in the top 50

▪ Malaysian Business Council

▪ Singapore’s economic policy board

▪ Companies merged for not meeting export targets in China, Singapore, South Korea

Shaped growth

agenda with the private

sector

Provided support, linked to

competitive-ness

Reduced tax distortions,

obsolete regulations

Engaged with firms to enable investment and competition

Built agile experiment-ation skills

Tapped global

expertise but tailored

local solutions

Built a more able

bureaucracy

▪ South Korean bureaucrats sent to train at German factories

▪ China rotating promising bureaucrats through functions

▪ India’s early reforms in industrial licensing and banking

▪ Ethiopia’s state-led investment in key sectors

▪ China’s youdian daomian policy to ‘fan out from a point to an area’

▪ Regulatory sandboxes in Singapore

Improved government agility and capability

7McKinsey & Company

Large companies have been important to the growth of outperforming economies.N = 25 economies; 6,474 companies

Ratio of large-company revenue and value added to GDP%

1118

26 27

64

1995–99

2000–04

2005–10

2011–16

22

41

60+42

Outperformers

6 10 13 13

1995–99

2011–16

2000–04

2005–10

1321

28 29 +16

Non-outperformers

Revenue

Value added

Revenue to GDP

Value added to GDP

8McKinsey & Company

Most emerging economies exhibit greater contested leadership among top firms.Percent of firms remaining in top quintile of economic profit (2001-05 and 2011-15)

20

34

36

43

50

58

60

62

63

63

68

76

South Korea

India

Malaysia

China & Hong Kong

Canada

Germany

Australia

Japan

France

Switzerland

USA

UK

45

62

High incomeOutperformers

9McKinsey & Company

Top emerging economy firms are more innovative, globally oriented, proactive and nimble than high-income peers.

56

51

48

Outperformers(China, India,Indonesia)

Non-outperformers(Brazil,South Africa)

High income(Germany,United States)

+8pp

Sales from new products% of sales

74

60

47

+27pp

LESSONS FROM ASIA

Comparison of self-reported performance and practices for top-performing firms across archetypes

Global expansion% prioritizing expansion abroad

58

19

25

2.3x

Digital disruption proactivenessPercentage points

Average investment speedNumber of weeks

13

11

19

-6wks

10McKinsey & Company

Reliance Jio made rapid investment to become a market leader.

SOURCE: Counterpoint Research Market Monitor Q1 2018; Photo credit: https://commons.wikimedia.org/wiki/File:Jio_Phone.svg

36

0

Q1 FY17 Q1 FY18

Reliance Jio India feature phone market share, %

Reliance Jio’s capital investment by quarter

outpaces its next largest competitor1

4:11 Based on reports of planned investment for Reliance Jio for 1 quarter in 2017 of $2.8B, compared to reports of planned investment by Bharti Airtel of $2.5B for 2017-2018

11McKinsey & Company

Transsion disrupted the African market by creating products that best served local customer needs.

SOURCE: McKinsey Global institute; Transsion Holdings; IDC; Q4 2017 CMR Report; Literature review; Photo credit: https://upload.wikimedia.org/wikipedia/commons/a/a7/Dual-SIM-Handy.jpg

46% 2017 market share in Africa

#1 in the African handset market

12McKinsey & Company

Looking ahead, emerging economies can grow trade increasingly amongst themselves.

Goods trade by development status, %$ trillion (current)

55 5143

35 33

29 3031

32 30

8 912

14 16

69 10

5 6 8 10 104

1995 2000

16

3

05

South-South

China-North

10

5

2016

15

China-South

South-North

North-North

100% = 7 11

Change in value of trade, 1996–2016Multiple

6x

11x

6x

3x

2x

South-South and China-South share of global goods trade rose from 8% to 20%

13McKinsey & Company

Automation could be an important source of labor productivity in emerging economies.

Annual labor productivity growth potential due to automationAnnual growth rate 2015–30%

Share of current work activities that could be displaced by 2030 due to automation% of total work activity hours

1.2

1.0

0.8

1.1

1.1

0.9

0.7

0.5

Indonesia

Nigeria

Philippines

China

India

Brazil

Mexico

Kenya

0.8–1.4

20

16

12

18

18

14

11

7

15

Outperformers

Non-outperformer emerging economies

Global average

14McKinsey & Company

With a boost in productivity, emerging markets can drive 72% of additional global growth and represent 55% of GDP by 2030.

2015 2030 baselinescenario

22%

19%

58%

2030 productivity boost scenario

112

2030

35

67

11

Outperformers

Non-outperformers

High income

% of 2030 GDP

45%

% of additional global growth

25% 33%

30% 39%

28%

Incrementalopportunity of$11 trillion

Global GDP potential scenario$ trillion, constant 2010 $

55% 72%

15McKinsey & Company

-3

4

Quartile 1

6

Quartile 3

5

8

Quartile 2 Quartile 4

7

-4

-2

9

-1

0

1

2

3

Côte d’Ivoire

Senegal

Heat map score based on fundamental indicators, 2011–16

Bolivia

Cameroon

Ecuador

DominicanRepublic

PeruMozambique

GDP per capita growthCAGR 2011–16, %

Nigeria

Pakistan

Rwanda

Algeria

Colombia

Angola

Sri Lanka

Tanzania

Bangladesh

MoroccoParaguay

Philippines

Kenya

Sustaining recent momentum could help some emerging economies join the next wave of outperformers.

3.5%

Countries with top quartile heat map scores and top quartile growth rates

Countries with top quartile heat map scores but lower growth

Countries with second quartile heat map scores

1

2 3

Download MGI research atwww.mckinsey.com/

@McKinsey_MGI

McKinseyGlobalInstitute