Outperformers:

High-growth emerging economies

and the companies that propel them
ANU MADGAVKAR | PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS | WASHINGTON DC

October 17th, 2018

CONFIDENTIAL AND PROPRIETARY Rated #1 Think Tank 2016 (private sector category) by
Any use of this material without specific permission of McKinsey & Company is strictly prohibited the Global Think Tank Index, University of Pennsylvania
Eighteen emerging economies sustained growth higher
than the advanced economies over long periods of time.

18 Outperformers surpassed 11 achieved >5%

p.a. over 20 years
high-income economy growth
rates of GDP per capita over Recent outperformers
long periods of time Outpaced US growth
consistently from
1996–2016

7 achieved >3.5% p.a. ▪ India

over 50 years ▪ Vietnam
▪ Cambodia
Long-term outperformers ▪ Laos
Outpaced US growth ▪ Myanmar
consistently from 1965–2016 ▪ Azerbaijan
▪ China ▪ Belarus
▪ Hong Kong ▪ Kazakhstan
▪ South Korea ▪ Turkmenistan
▪ Singapore ▪ Uzbekistan
▪ Malaysia ▪ Ethiopia
▪ Indonesia
▪ Thailand

McKinsey & Company 2

Most emerging economies showed low or inconsistent improvement relative to advanced economies,
and a few lagged advanced economy growth rates over 50 years.
Middlers (select examples)
No or inconsistent improvement relative to the US from
1965–2016
Very recent Consistent Volatile growers
accelerators growers  Argentina
 Bangladesh  Chile  Brazil
 Ghana  Colombia  Iran
 Poland  Czech Republic  Kenya
 Philippines  Egypt  Mexico
 Peru  Hungary  Nigeria
 Rwanda  Morocco  Paraguay
Underperformers
(select examples)
Slower relative growth
than the US from 1965–
2016
 Russia
 South Africa
 Ukraine
 Venezuela
 Zimbabwe

McKinsey & Company 3

GDP per capita growth among outperforming economies has far exceeded
that of other emerging economies.
Popu-
CAGR, GDP lation,
GDP per capita 1965–2016 2016 2016
Index: 100 = 1965 Archetype % % share % share
4,000
China
3,500 7.3 13 19

3,000 Long-term
4.7 5 6
outperformers (e.g.
2,500 Indonesia, Malaysia)
Recent 6.0
2,000 4 22
outperformers (e.g. (‘96-‘16)

India, Vietnam)
1,500
High income
1,000 2.0 59 13

500 Other emerging

1.7 16 31
economies
0
1965 70 75 80 85 90 95 2000 05 10 2016

McKinsey & Company 4

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

Higher productivity
▪ Capital accumulation added Strong and inclusive
income growth
~60% of total growth in
Outperformers or 4–5 pp of per ▪ 4–5 pp higher annual wage
capita GDP growth each year Sustained, high growth and….
▪ GDP per capita
Total factor productivity added
growth ▪ 2–5 pp higher annual net
~25% of total growth in income growth of large firms
Outperformers or 1-4 pp of per
capita GDP growth each year …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
McKinsey & Company 5
Outperformers have adopted pro-growth mindsets and approaches through a variety of ways.

Engaged with firms to enable Improved government

investment and competition agility and capability

Tapped
Shaped Provided
Reduced tax global
growth support, Built agile Built a more
distortions, expertise
agenda with linked to experiment- able
obsolete but tailored
the private competitive- ation skills bureaucracy
regulations local
sector ness
solutions

▪ Malaysian ▪ Companies ▪ Singapore, ▪ China’s youdian ▪ India’s early ▪ South Korean

Business merged for not South Korea, daomian policy reforms in bureaucrats sent
Council meeting export Hong Kong in to ‘fan out from industrial to train at
▪ Singapore’s targets in the top 5 on a point to licensing and German factories
economic China, ease of doing an area’ banking ▪ China rotating
policy board Singapore, business ▪ Regulatory ▪ Ethiopia’s state- promising
South Korea ▪ Indonesia and sandboxes in led investment bureaucrats
China in Singapore in key sectors through functions
the top 50

McKinsey & Company 6

Large companies have been important to the growth of outperforming economies. Revenue to GDP

N = 25 economies; 6,474 companies Value added to GDP

Ratio of large-company revenue and value added to GDP

%
Outperformers Non-outperformers

64 +42
60

41

29 +16
28
22 21
Revenue
13
26 27
Value 18
11 10 13 13
added 6
1995– 2000– 2005– 2011– 1995– 2000– 2005– 2011–
99 04 10 16 99 04 10 16
McKinsey & Company 7
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)

62
Malaysia 20

China & Hong Kong 34

Canada 36
45
South Korea 43

Australia 50

Japan 58

India 60

Germany 62

France 63

Switzerland 63

USA 68

UK 76
Outperformers High income
McKinsey & Company 8
 LESSONS FROM ASIA

Top emerging economy firms are more innovative, globally oriented, proactive and nimble than high-
income peers.
Comparison of self-reported performance and practices
for top-performing firms across archetypes

Sales from new Global expansion Digital disruption Average investment

products % prioritizing proactiveness speed
% of sales expansion abroad Percentage points Number of weeks

Outperformers
(China, India, 56 74 58 13
Indonesia)

Non-outperformers
(Brazil, 51 60 19 11
South Africa)

High income
(Germany, 48 47 25 19
United States)

+8pp +27pp 2.3x -6wks

McKinsey & Company 9
Reliance Jio made rapid investment to become a market leader.

Reliance Jio India feature phone

market share, %
Reliance Jio’s capital
investment by quarter
outpaces its next 36
largest competitor1

4:1
0
Q1 FY17 Q1 FY18

1 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
SOURCE: Counterpoint Research Market Monitor Q1 2018; Photo credit: https://commons.wikimedia.org/wiki/File:Jio_Phone.svg McKinsey & Company 10
Transsion disrupted the African market by creating
products that best served local customer needs.

2017 market
46% share in Africa

in the African
#1 handset market

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 McKinsey & Company 11
Looking ahead, emerging economies can grow trade increasingly amongst themselves.

Goods trade by development status, % Change in value of

$ trillion (current) trade, 1996–2016
Multiple
100% = 5 7 11 15 16
5 6 8 10 10 South-South 6x
3 4
8 6
9 9 10 China-South 11x
12
14 16 China-North 6x
29 South-South and
30
China-South share of
31 global goods trade
32 30 South-North 3x rose from 8% to 20%

55 51
43
35 33 North-North 2x

1995 2000 05 10 2016

McKinsey & Company 12
Automation could be an important source of labor productivity in emerging economies.

Annual labor productivity growth Share of current work activities that

potential due to automation could be displaced by 2030 due to
Annual growth rate 2015–30 automation
% % of total work activity hours

Outperformers China 1.2 20

Indonesia 1.0 16

India 0.8 12

Non- Brazil 1.1 18

outperformer
emerging Mexico 1.1 18
economies
Philippines 0.9 14

Nigeria 0.7 11

Kenya 0.5 7

Global average 0.8–1.4 15

McKinsey & Company 13

With a boost in productivity, emerging markets can drive 72% of additional Outperformers

global growth and represent 55% of GDP by 2030. Non-outperformers

High income
Global GDP potential scenario
$ trillion, constant 2010 $
% of 2030 % of additional
GDP global growth
11 112
35
30% 39%

Incremental
67 opportunity of
$11 trillion 25% 33%
22%

19% 55% 72%

45% 28%
58%

2015 2030 baseline 2030 productivity 2030

scenario boost scenario

McKinsey & Company 14

Sustaining recent momentum could help some emerging economies join the next wave of
outperformers.
GDP per capita growth
CAGR 2011–16, %
9 Countries with top quartile heat
8 map scores and top quartile
growth rates
7
1 Côte d’Ivoire
6
5 Philippines Bangladesh
Dominican
Sri Lanka Rwanda
4 Bolivia Republic
3.5%
3 Tanzania Mozambique Colombia Peru
Paraguay Kenya Pakistan Cameroon
2 Senegal Morocco Algeria
1 Nigeria Ecuador
2 3
0 Angola
Countries with top quartile Countries with second quartile
-1 heat map scores but lower heat map scores
-2 growth
-3
-4
Quartile 1 Quartile 2 Quartile 3 Quartile 4
Heat map score based on fundamental indicators, 2011–16
McKinsey & Company 15
Download MGI research at
www.mckinsey.com/

@McKinsey_MGI

McKinseyGlobalInstitute