Quality Vs. Quantity: Why Emerging Markets Must Concentrate on Sustainable Growth
As Brazil prepares to host two premier sporting events, the FIFA World Cup in 2014 and the Summer Olympics in 2016, some predict that the country will invest more than $60 billion USD in public works projects ranging from road expansions to the improvement of telecommunications networks. The infrastructure upgrades are not only necessary to accommodate the enormous amount of visitors these sporting events will bring to Brazil, but also to help solidify that country’s standing as an emerging market for growth.
As economic powerhouses, like the United States, faltered during The Great Recession that hit a few years ago, emerging markets like Brazil, Russia, India, China and South Africa were cast onto the world stage—spotlighted as the next phase of global economic growth. According to a recent article by McKinsey & Company, emerging market cities will generate more than 45 percent of global GDP growth between 2007 and 2025. The report also notes that the need to prioritize sustainable growth in emerging markets has never been more urgent. By sustainable development, the article refers to economic growth that improves lives without exhausting the environment or other resources.
Progress in emerging markets often begins with a focus on policy. In China for example, the adoption of western technology and knowhow was quite successful. That has been especially reflected in infrastructure development and the focus on moving the knowledge inland– balancing growth elements to develop a sustainable consumer base. Other emerging countries may still be in the earlier stages of this process, still requiring meaningful improvement in infrastructure in terms of scale and sophistication. Thus, secular growth momentum in the emerging markets will likely vary from country to country.
However, emerging markets must continue with forward-looking focuses. In China, the GDP forecast was recently lowered for 2013 and 2014 to 7.7 percent and 7.8 percent respectively. The economic gains from the adoption of new technologies and infrastructure have largely run their course. Now that these lower hanging fruits have been picked, it is critical that the country move toward broader economic goals and invest more in more sustainable growth, and so called “all-inclusive growth” rather than just rapid growth. China seems to be responding.
The country’s new government indicated earlier this year that it was interested in focusing more on the quality of growth rather than the quantity of growth. In other words, leaders would accept slower growth in exchange for higher quality growth. We welcome the government’s efforts to reign in the banking sector, including rapid credit growth, the explosion of “shadow banks” (financial entities that are less regulated) and the threat of impending defaults—all of which pose a threat to future growth. While experimenting with new policy measures is risky, if successful, these measures can help ensure sustainable growth long term.
In addition to my analysis, the McKinsey article highlighted China’s environmentally-conscious efforts to launch sustainable growth through transportation and greenway projects, modeled after the public transportation system in Curitiba, Brazil. By developing (over the last few decades) a more fuel efficient city busing system coupled with bike paths, Curitiba—a city of close to two million people– has one of the lowest rates of air pollution of any city in that country, improving the quality of life for the people who live there while keeping resources in check.
It’s this mindset that helps propel emerging markets toward quality growth, rather than just quick fixes, as they attempt to “carry the torch” for economic prosperity.