Why Emerging Economies are so important in the rapid adoption of the world’s digital transformation
This blog post is the first in a multi-part series on Asia’s digital adoption.
What are Emerging Markets
A hot topic swirling among businesses and investors are on emerging markets (also called emerging economies or emerging countries), nations that are making considerable investments and rapidly growing in a productive capacity. Emerging markets are attractive to investors as they tend to grow faster than developed markets. These countries have abrupt expanding economies and share some characteristics of developed markets, but do not meet standards or gross domestic product (GDP) rates of those markets (developed economy have a GDP per capita of at least $12,000 compounded with other economic and social characteristics). Some emerging countries may have lower than average per capita incomes and less mature capital markets than developed countries, but they show advancements in infrastructure, industrialization, urbanization, and growth in the middle class. Emerging countries are resilient, prevailing in growth despite their socio-economic factors or setbacks.
There are varying views on which countries are considered emerging markets. As of Dec 2018, the Morgan Stanley Capital International Emerging Market Index listed 24 emerging countries that included Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. Other sources also included Argentina, Hong Kong, Jordan, Kuwait, Saudi Arabia, Singapore, and Vietnam.
Why Emerging Markets are so important right now
Emerging markets (EM) are quickly being recognized as major players in driving overall growth in the world economy and possible on the political front. Their GDP growth contributes to world business expenditures, investments, government spending, and net exports. PricewaterhouseCoopers believes emerging markets will continue to be the growth engine of the global economy. By 2050, seven EM economies (E7) — Brazil, China, India, Indonesia, Mexico, Russia, and Turkey — could increase their share of world GDP from around 35% to almost 50%. China could be the largest economy in the world, estimated at around 20% of world GDP by 2050, with India in second place and Indonesia in fourth (based on GDP at PPPs).
With the growth in GDP, PWC anticipates this opening up great opportunities for businesses to make long-term investments in these markets. Investment is a key determinant of economic growth (1% point increase in investment or on average 0.15% point increase in annual average avg real GDP per capita growth). If EM countries are continually increasing their GDP growth rates, it can lead to a higher-than-average return for investors. Investments can raise economic growth by supporting infrastructure development in key areas like energy and transport, in turn boosting technological progress and productivity and promoting government spending.
Emerging countries are mostly focused on export-driven strategies since the same demand doesn’t exist locally. More often, they will produce lower-cost consumer goods and commodities to fulfill the demands of developed markets. With pro-business administrations in larger democracies like India and Indonesia, the focus is changing to develop internal markets to compete on the world stage with developed nations, in turn contributing to world net exports.
Emerging market countries are experiencing positive outlooks that will continue to unfold in the coming years. With the strong rise in the middle class, countries like India, China, and Brazil saw within the last 20 years an increase in middle-class income rising 23%. In another 10 years, we can expect it to rise another 37%. The middle classes of emerging markets are defined as $3,600 — $36,000 annual per capita income in purchasing power parity. Another important factor, emerging markets and developing economies (EMDEs) achieved a remarkable decline in inflation, from 17.3% in 1974 to about 3.5% in 2018. The lower inflation is associated with greater trade and financial openness.
Why Emerging Markets are quickly adopting a digital economy
Today’s emerging market consumers are just as connected as those in Europe or the United States and are as likely if not more to use online retail services. Smartphones are the key drivers for online access. The rapid adoption of smartphones and access to the internet has allowed EM consumers to be a major global player across different online activities and services. Pew Research found that internet usage among adults in EMs jumped from 40% to 60% from 2015 to 2018. In comparison to advanced economies, 83% of EMs own a mobile phone compared to 94% in advanced markets. BCG found that as of 2017, more than 2.1 billion internet users live in EMs. By 2022, that number will grow to around 3 billion and will have three times as many internet users living in emerging markets as those in developed markets.
Franklin Templeton reported that most young people (under the age of 30) in the world live in emerging market countries. Considering the vast use of mobile phones among young people in EM countries, there are tremendous market opportunities to tap into. FT also contributed that the growing adoption of technology and the growth of digital platforms to have helped create new goods and services for consumers across EMs, while creating growth opportunities for many EM businesses and investors.
As urbanization continues to grow across emerging communities, it will become easier to lie out high-speed networking infrastructure when urbanization is concentrated. With greater urbanization and population density, it should start to ease logistical challenges that online companies face when developing their services to grow online consumer spending. To compete with large online retailers, traditional retailers in EM countries are developing their own online capabilities using omnichannel strategies to compete for market shares and raise competition between brick-and-mortar to online goods and services, to all else in between.
Another key reason why consumers are switching to buying online is largely due to improved consumer access, experience, and convenience. Greater connectivity allows consumers to discover products and services that may not be produced locally while improving GDP growth in low-income and middle-income markets. This is made possible through high-speed internet for better connectivity. Digital services depend on local infrastructure for delivery. With this, the demand for fixed and mobile broadband infrastructure is exploding. Opportunities for network infrastructure companies will continue to grow, due in part to national governments’ greater focus on expanding digital connectivity. Yet, there are struggles still with a lack of broadband penetration, fixed and mobile, in emerging countries. This, however, has created opportunities for penetration. Many EMs are free to adopt new technologies, such as LTE and fiber-optic, without the burden of managing legacy infrastructures.
Progress has been constant to develop better digital infrastructures. Most mobile penetration is on 2G networks. 3G and 4G penetration far less. This creates opportunities for creativity and entrepreneurialism to make the most of the mobile connectivity that is available, such as using fiber-optic cables and new IP exchange points. Also, competition among 2G operators has led to creating ecosystems of value-added services built around networks and less sophisticated feature phones to provide users with a wide range of services. With the wheels in motion, there is a greater role for EM governments to play in developing necessary infrastructure projects. Public and private partnerships are proven methods of getting big infrastructure projects off the ground. Several emerging economies are using this tool to build out digital infrastructure and increase internet access.
The Credit Suisse Group reported that greater adoption of mobile payments in EMs is driving digital growth. A country’s e-commerce activities correlate with the willingness to make digital non-cash payments. India is likely to follow China, where the share of cash in retail transactions has fallen from 61% in 2010 to 38% in 2016. Growth in China’s mobile payment has impressively reached a value of more than 3 trillion USD in 2016 (up by 16 times the levels seen in 2013). Only $5.5 billion in e-commerce (which is less than 1% of total retail sales) was recorded in EMs in 2015. This is projected to grow exponentially to around $88 billion by 2025 (or 6.4% of all retail sales), according to a study by Google and Temasek.
What Emerging Markets are telling us
The world is taking notice of the rate of growth in Emerging Markets, on both the economic and technological front. With the recent elections in India & Indonesia, resounding pro-business incumbents are setting the stage. Re-elected President Joko Widodo’s (Jokowi) platform was on driving for economic improvements through investments in infrastructure in a bid to gain global competitiveness. Jokowi is looking to move Indonesia to higher-value-added ventures to help create jobs through high technology industrialization. In India, second-term Prime Minister Narendra Modi has been credited for helping India improve its rank in the World Bank’s Ease of Doing Business index over the last five years; with India now ranked 77th among 190 countries compared to 134th in 2014, which could attract more private capital from the U.S. and other countries. A “younger” India is looking for a stronger India and feels confident about what the government is doing for them. Emerging countries are seeking economic reform, and are looking to their government to drive this. In contrast, some developed countries are experiencing reform challenges such as the UK with recent events like Brexit and Theresa May’s resignation. EM countries are picking up momentum and pushing forward for economic growth. In the foreseeable future, emerging market countries will take a seat at the table with countries contributing considerably to the world’s GDP.
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Stay in touch for the next blog in this series where we look at what’s behind the momentum in Asia’s booming in digital adoption.
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