The rise of the southern economies

As the West fades, growth in South America, Asia and Africa is exploding. By 2030, developing countries will account for 70% of the globe’s total consumption.

New Delhi India665

The Gold Souk mall in Gurgaon, near New Delhi, India’s first specialty jewelry mall (Stephan Elleringmann/Lait/Redux)

Ten years ago, as a teenager growing up in Yangon, Myanmar, Min Zayar Oo dreamed of someday buying a laptop. Min’s family wasn’t poor. His father ran a printing shop. He went to good schools, including a private English academy. But even for him a laptop, any laptop, seemed far-fetched.

Today Min owns an Apple MacBook, one of the most expensive laptops you can buy. He works as a photographer for Reuters and other agencies, cashing in on the new western interest in his cautiously liberalizing country. “I remember, when I was 14 years old, laptops were a very big deal for us, for me,” he says. “I never thought—forget MacBooks—that I’d ever have one. Now, I’m not even satisfied with a PC.”

Min’s life has changed in many ways as new money has leaked into his country. He still lives with his parents, wife and sister in the family home in Yangon. But that home is now being renovated. Outside, the streets are filled with expensive new cars. Foreign firms are opening offices. At home, Min is most likely on his iPhone—a once unimaginable luxury—surfing the Internet.

All around the world, in countries like Myanmar and India and Rwanda—countries that are still poor, by any definition familiar to Canadians—millions of people like Min are climbing the economic ladder. Some are abandoning the countryside for more stable lives in the city. Others, like Min, are moving up to a place where MacBooks and BlackBerries are no longer just something to daydream about.

Lumped together, these different groups, from different classes and different countries, are shifting the global geography of the business world. Companies that have long thought of Africa and large swaths of Asia and South America as sources of cheap labour are starting to recognize that they are consumer markets, too. For businesses looking for growth, they will soon be the most important markets in the world, home to more people with more pure spending power by far than North America and western Europe, the engines that have driven economic growth for the past 150 years.

Min Zayar Oo of Myanmar used his new spending power to buy a laptop. (Tim Barker)

Min Zayar Oo of Myanmar used his new spending power to buy a laptop. (Tim Barker)

What that represents is nothing less than a revolution in the way global business is done. It will mean reimagining supply chains, reworking product lines and rethinking long-held beliefs about who buys what and where. It will happen fast, too. In a paper published in 2010, Natalie Chun, an economist at the Asian Development Bank, calculated that the annual purchasing power of the middle class in developing Asian countries alone more than quadrupled between 1990 and 2008, to US$4.9 trillion from US$1.1 trillion. Growth was less explosive, but still very real, in Latin America and the Caribbean, where annual middle-class purchasing power climbed from US$640 billion to US$1 trillion over the same stretch. By 2030, Homi Kharas, a senior fellow at the Brookings Institution and a former senior economist with the World Bank, estimates that 70% of the world’s middle-class spending will come from outside North America and Europe, up from 35% in 2009.

Underlying that growth is a massive worldwide shift of people out of absolute poverty. In 1990, 79% of people in developing Asian countries lived on less than US$2 a day, according to Chun. In 2008, that was true of only 43% of the same population. In Latin America, the percentage of the population living in absolute poverty halved over the same period, to 10% from 20%. In Sub-Saharan Africa, it fell to 66% from 75%, even as the overall population swelled.

In China alone, economic growth has helped push hundreds of millions of people out of extreme poverty in the past 30 years. Behind that growth is an urbanizing population and a liberalizing economy. The same is happening, in fits and starts, all over the world, as economies open and global trade becomes less and less tilted toward the North. But overall growth is only one factor in the expansion of the middle class. Just as important, it seems, is how the spoils of all that growth are distributed.

In a paper published in 2010, Kharas pointed to the contrasting examples of South Korea and Brazil. In the 1960s and 1970s, the two grew at roughly similar rates. But while South Korea’s growth was spread out across the population, Brazil’s pooled among the already wealthy. By the 1980s, Brazil was a middle-income country, but only 29% of its population was considered middle class. (Huge swaths, meanwhile, remained desperately poor.) By contrast, in South Korea, where per-capita income was only marginally higher, but gains were more evenly spread, a full 53% of the population was middle class by 1986. By 2010, less than 5% of the country was considered poor.

There’s no doubt increased global trade and investment have played a role in the growth of the developing world’s consumer class, says Bill Orme, chief spokesman for the group that produces the United Nations Human Development Report, which this year focused on the rise of the global south. But, Orme points out, the countries that are truly thriving, and setting the stage for long-term, stable, middle-class growth, are also investing heavily in education and health care and taking steps to reduce income inequality. “The countries that do that,” Orme says, “really do prosper.”

There are signs that is starting to happen in Brazil. Getulio

Getulio Fedelis (left)  with his son, Mateus, 18, spruce up their home in Rio. (Lianne Milton)

Getulio Fedelis (left) with his son, Mateus, 18, spruce up their home in Rio. (Lianne Milton)

Fidelis grew up in poverty in Rocinha, a massive slum in Rio de Janeiro. As a child, he lived in a tiny house with his sister and parents. When he was 16, his son was born, and he dropped out of school and worked menial jobs. But eventually, he went back to school, earned a university degree and is today part of Brazil’s emerging middle class. The house Fidelis shares with his wife and son has air conditioning, cable and two televisions. He owns a tablet computer, a laptop and a smartphone. He’s already thinking about a larger house and a car. Because he had access to education, he was able to get a good job. Because he has a good job, he can now consume, fuelling demand and making others wealthier as well.

“For the first time in 150 years,” the UN report notes, “the combined output of the developing world’s three leading economies—Brazil, China and India” was “about equal to the combined GDP of the long-standing industrial powers of the North—Canada, France, Germany, Italy, the United Kingdom and the United States.” By 2050, those three countries are expected to account for 40% of global output, doubling that of the fading northern giants. Consumption, too, will be more concentrated in the South: by 2030, the UN predicts it will account for more than 70% of the world’s total consumption expenditure.

For businesses or investors, the implication is clear. The consumers of the future won’t be in the G7. They’ll be in the developing world. In fact, many of them already are.

“You go around the world, and you see how much people in many countries want to have a BlackBerry,” says Paul Beamish, director of the Engaging Emerging Markets Research Centre at the Richard Ivey School of Business. “BlackBerry does a lot of its sales not just in wealthy countries but in emerging countries.” The company already sells a higher share of its phones in Saudi Arabia and the Philippines than it does in Canada. In May, the company introduced a new, lower-cost phone—the Q5—explicitly to attract more customers in the developing world. “If you look at China and say, what if 3% of the population could afford the sorts of things that we create in Canada? Well, that’s more consumers than the Canadian market has. Far more,” Beamish says.

That isn’t news to Robert Holderith. In 2008, he founded Emerging Global Advisors, a New York–based asset management company that invests exclusively in the developing world. One of the most compelling justifications for his strategy is the surge in spending power that occurs when a person breaks out of poverty. “When you’re earning $3,000 a year, that may be enough to live on,” he says. “When you earn $4,000 a year, you may have $1,000 in new discretionary spending money. If you earn $5,000 a year, and according to our wage growth that would happen in just over a few years, your discretionary spending effectively doubles.” That means twice as much to spend on junk food or soda, on cars, electronics, on anything the middle classes in Canada and the U.S. spend their money on now.

One thing those new consumers are definitely spending on: their kids. In recent years, Montreal’s Dorel Industries has established itself as the world’s largest manufacturer of car seats, partially by targeting new customers in the emerging world, especially South America. “The big driver for us is the amount of people moving into the consumer class,” says CFO Jeffrey Schwartz. “And what we’re finding is, when people do have money to spend on consumer goods, they like to spend on their children first.”

They like to have a good time, too. Imax, the Canadian owner and operator of super-giant movie screens, is banking on new customers in the developing world to drive future growth. For Asian consumers who like their entertainment a little rougher, there’s Canadian Victor Cui’s One Fighting Championship, the largest promoter of mixed martial arts in Asia. Already this year, Cui has promoted cards to fight-hungry fans in Kuala Lumpur, Singapore and Manila.

B.C.’s Canfor is tapping Chinese demand for timber and wood products. Stork Craft, based in Richmond, B.C., is selling cribs in Latin American and all over Asia. Nanak Foods is manufacturing traditional Indian foods like paneer and ghee in Canada and selling them to consumers as far off as Mauritius, South Africa and Trinidad.

For anyone interested in the new emerging middle class, patience will be a necessity. Growth has been explosive, yes. But it’s also uneven, and sometimes hard to predict. At the same time, waiting too long can be dangerous as well. The opportunities for businesses and investors presented by the new global middle class are enormous, but they could be fleeting. As more people move out of poverty in the developing world, more will become entrepreneurs themselves. They’ll target their own domestic markets, then move to compete on the global stage. That’s already happening. Between 1980 and 2011, South-South trade as a share of world merchandise trade rose from 8.1% to 26.7%, according to the UNDP.

In the end, that may be the real story of the middle-class boom in the emerging world. A source of labour yesterday, they are customers today. Tomorrow, they might well be competition. For Canadian companies, that means the time to strike is now. The firms that get in as the market is growing will be the brands consumers trust in 30 years, when the “developing” world is the largest source of purchasing power on earth.