Region could drive a global economic revival

by Michael Richardson

Amid concerns about sagging growth in both advanced and developing economies, Japan — which is heavily dependent on Asian demand — may take heart from the region’s potential to drive a global revival.

For centuries, less than 1 percent of the world’s population had sufficient income to spend on anything more than basic daily needs. But McKinsey consultants say a series of trends over the past two decades have powered growth in emerging economies, led by Asia, and more than doubled the ranks of the consuming class, to 2.4 billion people.

The trends include rapid urbanization, removal of trade barriers, integration of peripheral nations into the global economy, and the spread of market-oriented policies.

In 1990, the number of people earning more than $10 per day on purchasing power parity (PPP) basis was around 1 billion, or one-fifth of the world’s population. PPP reflects how much people living in a particular country can actually buy with their local currency. If they earn the equivalent of more than $10 per day, they move beyond food supply, shelter and other basic subsistence to make discretionary purchases of an increasing array of more expensive products, starting with items such as refrigerators, televisions and air conditioners.

Writing in the latest issue of McKinsey’s online quarterly magazine, the consultants predict that by 2025 the burgeoning number of consumers, in effect a worldwide middle class, will nearly double from the 1990 level, to 4.2 billion or more than half the global population of 7.9 billion.

“For the first time in world history,” they write, “the number of people in the consuming class will exceed the number still struggling to meet their most basic needs.”

By 2025, annual consumption in China, India, Indonesia and other emerging markets will rise to at least $30 trillion, up from $12 trillion in 2010. The McKinsey consultants calculate that by 2025 roughly 1 billion households in the developing world will be earning more than $20,000 per year on a PPP basis. Thirty trillion U.S. dollars is about double the size of the present annual value of goods and services produced by the U.S. economy, the world’s largest. It would make emerging market consumers the dominant force in the global economy.

A separate report by IHS Global Insights published earlier this month says that Southeast Asia is on its way to becoming the next big growth engine in Asia, after China and India. The 10 member-states of ASEAN (Association of South East Asian Nations) already have a combined GDP that exceeds India’s and could be bigger than Japan’s in 16 years, the report says.

It adds that ASEAN, with a combined GDP of $2.3 trillion in 2012, is set to reach nearly $10 trillion by 2030. Indonesia alone would account for $4 trillion of this total, surpassing both Australia and South Korea in GDP.

Of course, these projections may be upset. Protectionism, brought on by the current slowdown, might impede international trade and investment. Growing inequality in major emerging markets might result in social protests that become so serious they prompt governments to take actions to alleviate still substantial poverty at the expense of the middle-class as well as the rich.

China, the world’s most populous nation and now its second biggest economy, has gone from being one of the most equal countries in the 1970s to one with an even larger gap between rich and poor than the United States. India and Indonesia are experiencing similar inequality.

Exploding consumer demand in emerging economies may also grossly over-stretch available natural resources, creating unbearable air pollution, public health hazards, water shortages, and global warming emissions.

Still, McKinsey is confident that its forecasts will be borne out and may even be conservative, arguing that even under the most pessimistic scenarios for global growth, emerging markets are likely to outperform developed economies for decades.

The consultants say that a technological revolution with the spread of mobile phones and Internet access is helping to drive consumer demand. As electronic commerce and mobile-payment systems spread to even the most remote rural villages, “emerging consumers are shaping, not just participating in, the digital revolution,” they write.

Underpinning their forecasts is the sheer scale of the new consuming class in developing states long relegated to the periphery of the global economy.

The original Industrial Revolution, beginning around 1750, took two centuries to gain full force. Britain, where industrialization started, needed 150 years to double its economic output per person. In the second stage, the U.S. took more than 50 years to double per capita GDP.

A century later, when China and India industrialized, they doubled their GDP per capita in 12 and 16 years respectively. Moreover, Britain and the U.S. began industrialization with populations of about 10 million, whereas China and India started their economic ascent with populations of approximately one billion each.

“Thus the two leading emerging economies are experiencing roughly ten times the economic acceleration of the Industrial Revolution, on 100 times the scale — resulting in an economic force that is over 1,000 times as big,” the McKinsey consultants argue.

If they are right, the world can look forward to a long cycle of improvement in material living standards. What this may do to the global quality of life is another question altogether.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore. Email: mriht@pacific.net.sg