Inclusive Growth

2018: Moving the Needle on Inclusive Growth in Emerging Markets

Nearly a decade after the global financial crisis, emerging markets are poised for a middle-class boom. Our experts weigh in on what it will take to sustain growth in 2018 and beyond.

2018 marks the tenth anniversary of the global financial crisis. When it first erupted, emerging markets faced a global economy rocked by massive uncertainty, weakening demand for their exports and severe disruptions in the global flows of finance and investment. The future for emerging markets literally darkened overnight

A decade later, emerging markets have proved more resilient than expected. Not only have they sustained robust economic growth despite a tepid recovery in the high-income, developed markets, but they have also collectively become the biggest contributor to global economic growth.

Writing in South Africa’s Sunday Times in September, Martyn Davies and I projected that in the coming decade, emerging markets will add some 510 million new middle-class households and more than $9.1 trillion in consumer spending. Not surprisingly, China and India will create the bulk of new consumer demand among emerging markets. This coming middle-class boom in emerging markets will be fueled by investment in infrastructure, from logistics and transportation to communications. These investments will open up new opportunities for employment and business expansion as economies shift from export-oriented manufacturing to domestic, and mostly urban-based, services as the new driver of growth.

However, a prerequisite for emerging markets hoping to stay on this positive trajectory is to ensure more people can participate in and reap the benefits of growth. So, what will it take for emerging markets to sustain inclusive growth in 2018? To help answer the question, I consulted some of our senior fellows at the Mastercard Center for Inclusive Growth: Fan Gang, Rama Bijapurkar, Martyn Davies and Yasar Jarrar.

The ripple effects of China’s transition

In China, growing wages and increased urbanization are poised to shape the inclusive growth outlook for 2018. Wage growth will drive the expansion of the Chinese middle class while pushing low-end manufacturing to lower-wage countries like Vietnam, Bangladesh and Ethiopia. This in turn will lead to faster expansion of the middle class and more inclusive growth in those countries. In the Sunday Times article, Davies and I suggest these trends are mutually reinforcing, and together are creating a new wave of consumer demand in these emerging markets.

However, China’s urbanization will continue to present inclusive growth challenges as tens of millions of workers from China’s rural villages move to its cities. “Many of these migrant workers face discriminatory treatment in terms of access to basic services like housing, health care and their children’s education,” notes economist Fan Gang, who also serves as director of China’s National Economic Research Institute. “The next stage of advancing inclusive growth in China must be the full inclusion of migrant workers as residents of China’s rapidly expanding cities.”

Furthermore, Fan believes technology can help close the gender gap in employment and opportunities in new and surprising ways in China and elsewhere. The much maligned automation, Fan argues, can help women by making some jobs physically less onerous.

“A garment factory in Addis Ababa, Ethiopia, apparently hires more young women [than men] today because of the use of more advanced technology, just like the situation 40 years ago in Seoul or 30 years ago in Shenzhen,” Fan noted in a blog post last March.

Feb 20, 2017: A bank employee explains the use of an ATM card with a Point of Sale (PoS) machine to villagers in West Bengal during the Indian government’s recent demonetization program. Photo credit: DIPTENDU DUTTA/AFP/Getty Images

India: poised for digital transformation

In India, a digital wave in mobile payments and communications has begun to create the conditions for a profound transformation in its economy, which is expected to exceed 7 percent growth in 2018. But for that growth to be truly inclusive, writes Rama Bijapurkar, small businesses and consumers must become full participants in this transformation.

“The problem of digital inclusion is now not about the lack of products or ideas or models, or even customer willingness or ability,” writes Bijapurkar, chairperson of People Research on India’s Consumer Economy. “It is about doing the hard work of enrolling millions of small merchants and having helplines to hold the hands of the hundreds of millions of small consumers who might not be tech savvy but who want to get on board.”

The potential for digital inclusion is simply massive and could touch people in all walks of life, changing in unexpected ways how they go about their daily chores. Technology is opening up new possibilities for remote work, creating incentives for more women to join and stay in the workforce. “The [digital] aircraft has taken off,” says Bijapurkar, “but it now needs navigational aids to ensure it flies safely.”

Although India’s economy is surging and beginning to lift millions into the middle class, challenges remain; especially in creating decent employment opportunities for the 12-15 million Indian youth expected to enter the workforce annually in the coming decade. As Manu Bhardwaj and I pointed out in September, job growth in India’s formal sector has been essentially flat. If the current trend persists, only about half the youth entering the workforce will be able to find work in the formal sector, which could stymie India’s economic take-off.

Economic diversification in Africa to advance inclusive growth

In sub-Saharan Africa, political elites across much of the region have been the primary beneficiaries of its stronger economic growth, observes Martyn Davies, a managing director at Deloitte Africa. For inclusive growth to gain traction, African countries will need to diversify their economies away from an overdependence on resource and commodity production and toward manufacturing, he argues.

“There is no sector that diffuses growth in income and wealth in a society like manufacturing,” Davies told us. “And an expanding manufacturing sector could power the creation of a supportive service sector, which then becomes a growth driver in its own right over time.”

Smaller countries like Rwanda and Ethiopia are leading the way and could mirror the path taken by South Korea, Taiwan and Hong Kong in the post-war decades. Their success led to imitation by larger countries in Southeast Asia, and eventually by China and India. Hopefully a similar pattern could emerge in Africa.

Sept 5, 2017: Employees of a shoe manufacturing park at work in Addis Ababa, Ethiopia. Photo credit: Sharon Tshipa/SOPA Images/ LightRocket via Getty Images

Addressing high unemployment in the Middle East and North Africa

In the Middle East and North Africa, conflict and politics captured the headlines in 2017 and “stifled any meaningful economic reform,” says Yasar Jarrar, who also serves as an advisor at the Mohammed bin Rashid Centre for Government Innovation in Dubai. The lack of progress has left high youth unemployment and the lack of private-sector competitiveness unaddressed.

Jarrar also expressed that unemployment in the region is now mostly structural, which can only be mitigated by serious market and education reforms: “The regional governments know what needs to be done; however, they face the difficult task of initiating long-term sustainable solutions while managing short-term political crises.”

All is not bad news, however. The promise of digital technology to empower youth and women is growing. As Manu Bhardwaj and I wrote last May, “Technology and social media offer a pathway to turn the Middle East’s ‘youth bulge’ into a ‘youth dividend’ that drives inclusive growth. With the rise of e-commerce, entrepreneurship and digital adoption, technology is giving young Arabs new hope.”

Moving the needle on inclusive growth

The forward momentum of emerging markets today is self-evident, and their longer term trajectory is more promising than expected a decade ago.

However, the challenge of advancing inclusive growth in different emerging markets is context-specific, as informed by our Senior Fellows. Hence, actionable insights that are grounded in a deep understanding of local conditions are needed, as are new partnerships between the public and private sectors to tackle some of the persistent roadblocks to inclusive growth.

An example of actionable insights developed with deep and detailed local information is the use of anonymized and aggregated Mastercard data by researchers at Harvard’s Center for International Development. They are gaining a new understanding of international tourist spending and its impact on local economies and income and job creation for previously excluded populations. The private sector can play a much bigger role in advancing inclusive growth, especially in applying its data, technology and innovation to overcome key barriers to inclusion and empower people with access to financial services and other tools to increase their productivity and improve livelihoods.

Armed with an evidence base for action and tapped into capabilities across sectors, we can accelerate progress towards inclusive growth and realize the full promise of the emerging middle-class boom.

Yuwa Hedrick-Wong is chief economist for the Center for Inclusive Growth.