Is the Luster of Emerging Markets Fading?
February 10, 2012
Reports that growth is slowing in many emerging markets has some analysts wondering if globalization’s reality has finally caught up with its hype. A study published by DHL entitled the Global Connectedness Index (GCI), however, indicates that globalization still has room to grow. [“Perhaps Globalization Is Not Quite as Advanced as Some Thought – and Some Descried,” SupplyChainBrain, 16 November 2011] The article states, “A detailed country-by-country analysis of the flows that connect the world indicates that globalization is still not as advanced as most people believe and that continued economic integration could spur global gross domestic product gains of five percent or more.” It continues:
“GCI ranks 125 countries according to the depth and breadth of their integration into the world economy and also examines the relationship between global connectedness and welfare. The study documents that global connectedness has enormous room to expand, even among the most ‘connected’ countries. … The study was commissioned by DHL and conducted by global business strategist and economist Pankaj Ghemawat, professor of global strategy at the IESE Business School, Barcelona. ‘This research provides evidence that a connected world is a better world, in terms of global welfare and individual development. The free trade of products and services contributes significantly to global prosperity,’ said Roger Crook, chief executive officer, DHL Global Forwarding, Freight. The data findings of DHL’s study will likely be of benefit to corporate as well as political and economic leaders as they shape business and trade strategies, Crook said.”
Speaking of corporate business and trade strategies, a study released by Accenture indicates that many businesses are at sea when it comes to developing such strategies. [“Execs in search of an EM strategy,” by Rob Minto, Financial Times, 25 January 2012] According to the study, “Forty percent [of executives] do not believe that their companies possess the strategic and operational capabilities to fully grasp the opportunities in emerging markets.” As Minto puts it, “That’s not a confident place to be. And it gets worse.” To bolster his arguments, he cites a few other points made in the study. He writes:
“[The study also reports:] ‘The same proportion acknowledge that they do not fully understand the competitive dynamics they will face. Nearly one-third do not even believe that their company has a clear strategy for high-growth markets.’ This is despite the fact that 80 per cent of those surveyed said their company’s primary focus for growth was on emerging economies. In other words: we know which way the world is going, we know where we want to be – but we don’t what to do about it. And those surveyed feel under time pressure too: ’73 percent of respondents believe they need to accelerate their efforts, or may already be too late, to build satisfactory market share in these high-growth markets.’ There is accelerating and there is changing course: ‘Some 57 percent of respondents to our survey acknowledge that they need to “reassess” or “fundamentally rethink” their approaches and capabilities to compete and win in high-growth markets.'”
If conclusions drawn from both the DHL and Accenture studies are true (i.e., if emerging markets continue to represent significant business opportunities but companies aren’t prepared to exploit them), then companies need to reassess where they are and how they are going to change to take advantage of emerging opportunities. The SupplyChainBrain article continues:
“[Crook stated,] ‘By calibrating how truly connected we are, countries can identify opportunities and the channels through which they can improve their prosperity.’ ‘Our research shows that global economic integration is not as deep as perceived. Therefore, we see untapped potential for growth for each country and globally. Increasing global connectedness is likely to spur further growth by adding trillions of dollars to global gross domestic product,’ added Ghemawat. The DHL Global Connectedness Index 2011 examines data on 10 different types of international flows, covering the categories of trade, capital, information and people, over the years from 2005 to 2010. Unlike existing indices, the GCI analyzes not only the depth of countries’ cross-border interactions but also their geographic breadth – distinguishing countries that are truly connected across the globe from those with deep ties only to a small set of partner countries. Additionally, it is based exclusively on hard quantitative data.”
According to the GCI, “the 10 most connected countries are: the Netherlands, Singapore, Ireland, Switzerland, Luxembourg, the United Kingdom, Sweden, Belgium, Hong Kong (China) and Malta.” The article continues:
“The diversity of the leading countries is even greater in the top 50 list, which includes representatives from all six continents. These patterns indicate that the benefits of connectedness are accessible to a broad range of countries, not just trading hubs that lead many other globalization indices. ‘The positive impact of global connectedness on world prosperity will continue to be of great importance. The misgivings some political leaders have about increasing global integration are misplaced; its benefits far outweigh the potential downsides,’ said Ghemawat.”
The article concludes by providing six “key takeaways from the index.” They are:
“• The actual level of connectedness today is much lower than commonly believed; its potential for positive growth, therefore, is significant.
“• The Netherlands ranks No. 1 in terms of overall connectedness, Hong Kong scores the highest regarding the depth of its international connections, and the United Kingdom tops the list for the breadth of its connections.
“• Despite increasing its trade interaction in recent years, the United States ranks No. 25 overall. The United States is a leader in term of breadth (#3), but as is expected for a country with a very large internal market, it lags on depth (#84).
“• The lion’s share of international connections are still concentrated among countries that share borders (such as in Northern Europe) as well as cultural and historical ties, which indicates that much of today’s globalization is actually regionalization.
“• Larger countries score higher on the global breadth of their connections; smaller countries excel in the depth of their connectedness.
“• Countries that pursue public policies that directly encourage greater international flows, as well as policies that improve the domestic business environment, can enhance their global connectedness.”
For a number of years, I have argued that regionalization, within the largest context of globalization, would likely increase. The GCI strengthens my belief.
Malory Davies, Editor of Supply Chain Standard, believes that companies should take a closer look at the so-called CIVET countries when shaping their business and trade strategies. [“Drop the BRIC, it’s time to focus on the CIVETS,” Viewpoint, 28 November 2011] Davies writes:
“Just as we all got used to the idea that BRIC is where it is all happening and must figure in any self-respecting supply chain strategy, it turns out that BRIC is now last year’s thing and we must all now refocus on CIVETS. BRIC, of course, stands for Brazil, Russia, India and China – four huge countries with rapidly developing economies. However, it transpires that they are not the fastest growing economies. That accolade goes to the CIVETS. The CIVETS are Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, and they have been highlighted for the speed of their economic growth, which is far outstripping the BRIC countries.”
Davies is an analyst who believes that some of the luster of emerging markets is fading. “There is no denying that economic globalisation has gone off the boil,” he writes. “In fact, there is clear evidence of a decline in global trade levels.” Nevertheless, he believes that “for most organisations, there is still plenty of room to take advantage of the opportunities in the BRIC economies – both as sources of products and as markets.” He concludes:
“Local domestic consumption around the world is still growing slowly. Perhaps the emergence of the CIVETS will give the process of globalisation added impetus. It will certainly have an impact of the shape and structure of supply chains in the future.”
In January of this year, Davies’ magazine reported that some studies paint a more upbeat picture of emerging markets than he was painting last November. [“Emerging markets still shine, says Agility report,” Supply Chain Standard, 17 January 2012] The article reports:
“Global economic uncertainty and Middle East political turmoil are doing little to dim the attraction of emerging markets, which show signs of reducing their dependency on developed markets as they compete to be the trade hubs of the future, according to latest Emerging Markets Logistics Index from Agility. The countries that dominated the rankings continued to be those that combine size and robust growth. China ranked first; India second; Brazil third. Saudi Arabia and United Arab Emirates came in fourth and fifth, and Indonesia and Russia sixth and seventh, respectively. Malaysia moved up three places from last year’s rankings to land at No 8. Chile was No 9, and Mexico was No 10, falling two places. The annual Index spotlights 41 emerging markets and ranks them by their investment potential and progress each year. Attractiveness is measured by: market size and growth, market compatibility (foreign direct investment, security, urbanisation and wealth distribution) and market connectedness (international and domestic transport infrastructure). The report, sponsored by global logistics provider Agility, is compiled by Transport Intelligence.”
Essa Al-Saleh, Agility’s president and chief executive officer for Global Integrated Logistics, stated, “There’s growing evidence that their dependence on the established markets is diminishing as new trade lanes grow and consumer demand in huge markets like China and India gathers strength.” In other words, Agility’s Emerging Markets Logistics Index confirms that regionalization is on the rise.
Peter Mandelson, who recently led a a year-long review of globalisation for a British think tank called the Institute of Public Policy Research, indicates that the study makes “makes two fundamental points.” Those points are:
“Firstly, like our model of capitalism itself, globalisation is not working in the way it can and should in progressive societies. Secondly, globalisation remains one of the best tools we have to achieve those progressive goals at the global level as long as we have the right policies to guide it.” [“Don’t give up on globalisation,” Financial Times, 24 January 2012]
Mandelson believes that globalization is getting a bad rap because its results haven’t measured up to its hype. “That sense of frustrated potential,” he writes, “goes to the heart of the problem with globalisation. The term has become shorthand for the ills of economic change.” He continues:
“We lived in a very unequal world before globalisation, so globalisation itself is unlikely to be the cause of inequality. The problem is how we provide access to opportunity and share the benefits of economic growth. By potentially opening a global marketplace for goods, services, supply chains and ideas, globalisation has been a huge source of both opportunity and growth. We have, however, done a relatively poor job of sharing access to them, especially in the west. Stagnant middle class incomes and growing inequality between top earners and the rest tell their own story. The consequences of that failure – blue collar anger at lost jobs, white collar anxiety at rising job insecurity and general anger at the way in which a small elite appear to be hoarding the economic gains of the last two decades – is now posing a serious problem for an open global economy. This is especially so in the US, where open trade is often distrusted, and globalisation blamed, with potentially disastrous consequences for the rest of the world. The only answer is to stop seeing globalisation as a phenomenon, which implies it cannot be stopped or shaped.”
Mandelson correctly points out that “the shipping container and the internet are genies that can’t go back in the bottle – nor would we want them to.” He then goes on to describe some of the findings of the study he led. He concludes:
“Globalisation is a means, not an end. This way of seeing things challenges equally the political right and left. The anti-globalisers of the left have always underplayed or ignored what is good about the expanding reach of global markets by focusing on the (legitimate) grievances of the short-term losers. The right has too often shrugged off the negative social effects of global markets as unavoidable or even a price worth paying for the benefits of ‘liquidity’. Capitalism’s ability to adapt and reinvent itself is its greatest strength. The same is true of globalisation. … Preserving the benefits that come with open global markets for ideas, trade and investment means acting now to reduce the risk in those markets and better share the benefits they bring to our own economies. … The complicated reality is that for global prosperity, like capitalism, globalisation is both the problem and the solution. Globalisation is dead. Long live globalisation.”
Companies know that markets in developed countries are saturated and that the only real opportunities for growth are to be found in emerging markets. There is opportunity enough to create jobs in both developed and developing nations IF we can figure out how to maintain and/or foster the middle class. Many of the middle class jobs that will be developed will be found within the supply chain sector since you can’t really have globalization (or regionalization) without efficient supply chains.