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The Rise of Developing Nations in 10 Charts

Investors are reminded almost daily that the world is changing—that the post-war era of U.S.-led economic growth is becoming a thing of the past. While the U.S. economy remains one of the most dynamic and resilient in the world, the collective economic might of the developing nations—with China at the forefront—continues to grow and expand on both an absolute and a relative basis.

To put this phenomenon into perspective, here are ten charts that provide a vivid but simple snapshot of a world in dramatic flux.

Source: Joseph P. Quinlan, chief market strategist of U.S. Trust , Bank of America

1. Yesterday’s Laggards are Today’s Leaders 1. Yesterday’s Laggards are Today’s Leaders

Exhibit 1: Contribution share to Global Economic Growth (Nominal GDP)

*Projected

Source: IMF

While the global integration of the developing nations began in earnest in the 1980s and continued in the
1990s, it has been only in the past decade that the developing nations have emerged as key drivers of and
contributors to global economic growth.

Global growth was derived primarily from the developed nations in the last two decades of the 20th century, with the United States and Europe in the lead. Hence the cliché back then: “When the developed nations sneeze, the developing nations catch a cold.” Times have changed.

The developing nations were critical contributors to global growth in the first decade of this century, with the net contribution between the developed and developing nations almost evenly split. More important, based on projections from the International Monetary Fund, the past will not be prologue. The baton of global growth has been passed from the debt-laden West, with Europe the primary drag, to the younger and more dynamic developing nations. Between now and 2018, the developing nations are expected to contribute to over 60% of world gross domestic product (GDP) growth.

2. The New World Economic Order 2. The New World Economic Order

Exhibit 2: Developed v. Developing GDP (% of world, Purchasing-power parity)

*Estimates for 2012-2013, projections for 2014-2018

Source: IMF

Not unexpectedly, the greater the contribution from the developing nations to global growth, the greater their share of the world GDP pie.

The inflection point has already come and gone—in 2009, for the first time in over a century, the developing nations accounted for a greater share of world GDP than the developed nations. The developing nations’ share of world GDP was 54% in 2012 versus the developed nations’ share of 46%; the former’s share is only expected to increase in the years ahead given favorable demographics, expanding labor forces, less burdensome public-sector debt levels and rising real wages, among other factors.

3. Cheap No More—Wage Growth in the Developing Nations 3. Cheap No More—Wage Growth in the Developing Nations

Exhibit 3: Annual Average Real Wage Growth by Region

Source: International Labor Organization

While real wages in the developing nations lag those in the developed nations, in many key countries like India and China, workers of all stripes are demanding and receiving higher wages.
As Exhibit 3 highlights, average annual real wage gains over the past few years have been much more pronounced in the developing nations than in the developed nations. This dynamic reflects a number of variables: Many workers in the developing nations are better skilled, better educated, and better adept at levering technology than the previous generation of workers, portending higher productivity levels and wage rates. These workers are also more apt to work and live in the cities as opposed to rural areas, where wages and incomes are lower. In addition, labor shortages (notably among skilled laborers) in China, India and many other economies have helped drive up wage rates and put more income in the pockets of the emerging market consumer.

4. Better Pay Equates to Higher Per Capita Incomes 4. Better Pay Equates to Higher Per Capita Incomes

Exhibit 4: Developing Market Real Per Capita GDP Growth (Annual % change)

*IMF Projections

Source: IMF

Rising wages can do wonders for consumers and countries (the effects on companies, of course, are not as celebratory).

Better pay translates into higher per capita incomes and more disposable income for large swaths of the labor force. Workers are transformed into consumers, with this new consuming cohort evident in consumption-led developing nations like Brazil, the Philippines, Poland and Indonesia. As Exhibit 4 highlights, real per capita income growth in the developing nations dipped in 2009 as the global economy adjusted to the U.S.-led financial crisis of 2008. Annual growth rebounded thereafter and is expected to average roughly 4% per annum over the next few years, well ahead of expected rates in the developed nations. Per capita incomes across Europe have remained stagnant or declined over the past few years; meanwhile, median incomes in the United States have remained flat or declined in many households.

In the end, rising per capita incomes in the developing nations are a key signpost of increasing wealth and future prosperity.

5. Higher Per Capita Incomes Equate to an Expanding Middle Class 5. Higher Per Capita Incomes Equate to an Expanding Middle Class

Exhibit 5: The Rise of the Emerging Market Middle Class (Billions of People)

*Estimate

Source: McKinsey & Company, Winning the $30 Trillion Decathlon: Going for gold in emerging markets

A critical offshoot of rising per capita incomes is the spread and growth of a middle class—or a cohort with enough purchasing power to live and consume above and beyond meager levels of subsistence.

How big is this new consuming cohort? In Asia alone, the so-called “middle class” is expected to more than triple to 1.75 billion people between now and 2020.1 According to research from McKinsey, the number of people earning more than $10 per day—the level that affords households the ability to purchase discretionary items like refrigerators or televisions—rose from roughly 1 billion in 1990 to 2.4 billion in 2010. By 2025, according to McKinsey, the number is expected to double again, to 4.2 billion consumers. By then, “for the first time in history, the number of people in the consuming class will exceed that number still struggling to meet their most basic needs.”

6. Middle Class Growth Means More Consumption 6. Middle Class Growth Means More Consumption

Exhibit 6: Developing Countries are Consuming More (Personal consumption expenditure as % of world total)

Source: UN

Personal consumption levels in the developing nations have rocketed over the past decade, a rise fueled by higher wages, greater labor force participation, increasing employment, and the improving economic status of women, to name just a few variables at work.

Aggregate personal consumption levels in the developing nations totaled $4.7 trillion in 2000, or roughly 24% of the global total. Then, personal consumption was more a Western phenomenon or the preserve of the wealthier nations of Europe and the United States. The developing nations had neither the income nor the consumer scale to drive global consumption.

Times have changed, however. Consumption remains important in the West but the developing nations presently account for roughly 36% of total global personal consumption. Between 2000 and 2011, personal consumption expenditures soared 213% in the developing nations, while rising 73% over the same period in the developed nations. Across the universe of the developing nations, consumption is now big business.

7. More Consumption Means More Demand for Imports 7. More Consumption Means More Demand for Imports

Exhibit 7: Share of World Imports

Source: IMF

There is a strong correlation between consumption and import demand. The latter is dependent on the former. To wit, as jobs and incomes have increased in the developing nations over the past decade, so has the demand for imports of goods and services—think soaring demand for automobiles, cell phones, consumer electronics, apparel, as well as demand for various services including education, healthcare services, and online music/movies.

As a result, world trade flows are rapidly being altered. The developing nations’ share of world imports reached a record 48% share last year. Imports totaled $8.9 trillion in 2012, a greater than fourfold increase from 2000. America’s share of world imports, meanwhile, declined from 18.8% of the global total in 2000 to 12.6% last year. China ($1.8 trillion in imports in 2012), South Korea ($519 billion) and Hong Kong ($504 billion) rank as the top three-largest importers among the developing nations.

8. More Demand for Fuels, Food and Other Commodities 8. More Demand for Fuels, Food and Other Commodities

Exhibit 8: Developing Market Consumption: Emerging Market Appetites for Food* and Energy** (Index, 2000=100)

*1000 metric tonnes

**Million tonnes oil equivalent (includes oil, natural gas, coal, nuclear energy, hydroelectricity, and renewables)

Sources: FAO; BP’s Statistical Review of World Energy

Emerging market consumers are placing unprecedented demand on various commodities. Unlike previous generations, this cohort is mobile and connected, likes to travel, and has the per capita income to eat healthier foods—think more consumption of meats, fruits and vegetables.

Energy consumption (defined here as the consumption of oil, coal, nuclear power, natural gas, renewables and hydroelectricity) in the developing nations soared 66% between 2000 and 2011. The developing nations’ share of world energy consumption now stands at roughly 62% of the world total, up from 48% at the beginning of the century.

Meat consumption in the developing nations jumped 37% between 2000 and 2011; emerging market consumers now account for 61% of global meat consumption, 88% of world vegetable consumption, and 79% of all consumed fruits.

All of the above has placed unprecedented strain on the world’s water infrastructure/supply because energy and food production is very water-intensive. It takes a great deal of water to produce one barrel of oil, one pound of chicken, and one head of lettuce. Hence as more of the world’s population consumes more food and energy, the key commodity to watch is water, undeniably the world’s most precious resource.

9. The Emerging Market Consumer Cycle is in its Infancy 9. The Emerging Market Consumer Cycle is in its Infancy

Exhibit 9: Developing Economies’ Consumption as % of World GDP

Source: UN

Emerging market consumers have already left an indelible mark on the global economy. There is hardly an industry, commodity or asset class that has not been touched by the rise of the “Rest.”

But the collective footprint of this cohort is still in its infancy. Note from Exhibit 9 that while the developing nations’ consumption as a share of world GDP has increased by over six percentage points since 2003, the overall share remains low, at just over one-fifth of the total in 2011. We expect the share to be closer to one-third in a decade as consumption-led growth becomes the norm in such emerging giants as India and China; as urbanization continues apace; as more women participate in the economy; and as real wages continue to rise thanks to a more skilled and productive labor force. The variables just mentioned—and others—will underpin rising personal consumption levels in the developing nations over the medium-term and boost their weight in the mix of global GDP.

Greater Internet use will have a similar effect. The coming connectivity of the 4.5 billion people presently offline— or disconnected from the Internet—will be a key driver of more jobs, income and spending in the emerging markets in the future.

10. Back to the Future—The Re-emergence of China and India 10. Back to the Future—The Re-emergence of China and India

Exhibit: Back to the Future (% of world GDP)

*In 2010, GDP on a PPP basis using numbers from IMF were 19.5% for U.S. and 13.6% for China

Source: Martin Jacques, When China Rules the World: The End of the Western World and the Birth of a New Global Order.

In 1820, the world pivoted around China and India, with the twin giants of Asia accounting for nearly half of world GDP. The “North,” meanwhile, or the developed nations, accounted for less than one-third of the global total.

However, due to the Western-led Industrial Revolution, China’s turn inward, the spread of colonialism, and other factors, the economic might of China and India waned over the next two centuries, while that of the West, led by the United States, rose sharply. In 1950, for example, China and India combined accounted for only 8.8% of world GDP—a far cry from 1820.

But by 2000, their share of global output had roughly doubled, to 17%. Led by China, the duo’s share of world GDP then surged to nearly 30% by 2010. By 2030, with consumers in both nations as key drivers of economic growth, China and India are expected to re-emerge as the world’s largest and most dynamic economies, effectively ending the 200-year economic reign of the West.

Investors are reminded almost daily that the world is changing—that the post-war era of U.S.-led economic growth is becoming a thing of the past. While the U.S. economy remains one of the most dynamic and resilient in the world, the collective economic might of the developing nations—with China at the forefront—continues to grow and expand on both an absolute and a relative basis.

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