By Anil Gupta & Haiyan Wang
Emerging markets are facing severe headwinds: 2015 will be the fifth consecutive year of economic slowdown. China’s days of breakneck growth are gone for good. Global volatility—coupled with the American economy’s strength—is causing a retreat to the safety of the US dollar. As a result, emerging-market currencies have depreciated.
This year will be the first year since the 1980s to see emerging-market capital outflows exceed inflows. However, today’s events aren’t necessarily a good guide to longer-term trends.
First, look at developments in the global economy. While the United States remains robust, Europe’s and Japan’s prospects are modest at best. Softer prices for oil and other commodities are a boon to China and India, which together account for almost 40 percent of the world’s population.
This situation means that, even in 2015, emerging markets will grow at twice the pace of developed markets. Even after factoring in currency depreciations, the emerging markets’ share of the global economy continues to rise. In 2000, according to the International Monetary Fund, that share stood at 21 percent. This year it will almost double—to 40 percent. By 2020, it will be 44 percent, and by 2025, close to 50 percent. If you want growth, you have no choice but to engage with emerging markets. Another big reason for optimism is the major structural changes under way in those markets.
The population is young. Africa is 10 years younger than the world average. India is nearly 20 years younger than Europe or Japan, and nearly 10 years younger than the US. This young population is becoming more literate, informed, ambitious and entrepreneurial. It’s also more urban. By every measure, on every continent, the quality of both governance and infrastructure is better than it was 10 years ago, and it keeps improving.
Given this analysis, we have some advice for developed-economy companies. First, defend your strengths in your home markets: You’ll need the cash flow and the technological strengths they grant you. Two, spread your bets across several of the bigger emerging markets. Three, build deep knowledge of the major emerging markets. And, four, keep track of rising companies from those markets. They may be your next competitors—or worthy partners.
Anil Gupta is a professor of strategy, globalization and entrepreneurship at the University of Maryland’s Smith School of Business. Haiyan Wang is the managing partner at China India Institute.