W1 Insight

The BRIC economies – Brazil, Russia, India and China – everyone is talking about them. There’s nothing new to know and we’re all doing everything in our power to help our firms benefit from engaging with these rapidly growing economies. Aren’t we?

These emerging economies, as they are frequently referred, are set to deliver 40% of global economic growth from now to 2018. China will be the largest of these economies. It’s already the second largest economy in the world, having just overtaken Japan and is forecast to become the largest economy in the world, in GDP terms, by 2020. (Deutsche Bank Research 2010)

At that time, in 2020, the big four economies in the world will be China, the EU, the USA and India and will represent 60% of all worldwide economic activity (PWC). The top economies by 2030 will be – China, USA, India, Japan, Brazil, Russia, Germany, Mexico, France and UK. In 2005 the UK economy was the fifth largest economy in the world. In just 25 years that will have slipped to 10^th or even lower. How will this impact our international competitiveness?

You just can’t get away from the numbers when explaining what going to happen as the world’s economic and ultimately political-power transfers from the developed economies of ‘the west’ to the fast growth emerging seven economies – China, India, Brazil, Russia, Mexico, Indonesia and Turkey (E7). In 2008 foreign direct investment (FDI) into the developed economies was over half of all worldwide foreign investment. This year we expect that to be reversed with developing countries taking 52%. FDI brings the capital necessary to fuel growth and as the balance of investment swings even further in favour of the emerging economies the growth differential between them and us is only likely to widen, further weakening the relative importance and influence of ‘the west’ in world affairs.

China has the world’s largest working age population and a rapid rura- to-urban population migration. It’s a country in rapid, energetic and sustained economic and social transformation.

Today, around 200 million Chinese are active in their marketised economy, about another billion are waiting their turn to join in and for their share of the wealth that it’s generating. Imagine what’s happened in the last 29 years of Chinese marketisation being repeated five more times just through the engagement of the whole of its population. The world is set to see the low-cost Chinese economy dominating for the whole of this century. At the same time they’re experiencing their own agricultural revolution, industrial revolution, service economy explosion and the growth of their own ip (intellectual property) economy. China will impact every country and every economic sector for the rest of the 21^st century and beyond. Things are never going to return to the way they were.

This transformational growth will change how the global markets operate, where our preferred launch markets are, where we get the capital to grow our firms and who sets the governance of world business and ultimately global politics and security in the future. Along with China and Brazil, Russia and India are set to multiply this effect by a factor of two or even three. Now is the time to decide how to engage with these economies, with what they produce and consume, or just get out of their way.

Over the next decade we expect disposable incomes to increase dramatically in the BRIC economies, and consequently we will see a rapid increase in their middle class making them more attractive as consumer markets than even the explosive growth of their economies might suggest. Disposable incomes in Brazil are expected to grow 3-4% per annum (pa), Russia and India by between 5% and 7% pa and China 8.6% pa. (Next Vietnam). There has never been a better time to consider what propositions you could take to this rapidly growing consumer base, or what service proposition you could take to those locally who are servicing this explosive growth.

In developed economies consumer shock is driving more people to save and consequently spending is weakened. This is likely to continue in the medium term hindering discretionary spending, economic recovery and growth. (FT) The key to consumer-driven growth will be the incremental discretionary spending year-on-year in our markets yet the EU is set to see a fall of $77 billion whilst Asia is set to spend an addition $125 billion per annum.

Western consumer debt is accelerating the rate at which the emerging BRIC economies and the other fast growth economies of the world are taking over the reins of global economic power. The Great Recession of 2008-2009 has left a monumental debt in the developed economies. This will need to be paid down before vital investment can continue in the fast growth, new global industries that will fuel the world’s economies in the coming decade and beyond. The comparison couldn’t be more stark. An ageing, high cost, low growth, developed, world economy with rigid labour laws, high regulatory control and enormous debts, compared to the young, high growth, high capacity, booming, markets of the emerging economies.

Where will you put your focus? It’s an opportunity or a threat depending on your perspective.

Where are you planning to spend your energies: the developed, or emerging, economies?

How are you ‘orienting’ your firm to take ‘advantage’ of these booming economies?

Who in your business is tracking the opportunities and threats that come from the developing world?