Why emerging markets have grown, and one economy studied

Overview

Demography, natural resources, industrialisation, foreign investment, liberalisation, education and infrastructure as drivers of growth, worked through one economy in detail.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   How has demography contributed to the growth of emerging markets?

   Model answer

   Falling birth rates following earlier falls in death rates leave a large working-age population supporting relatively few children and elderly dependants, a temporary window known as the demographic dividend. This raises output per head, increases household savings available for investment, and supplies abundant labour that keeps wage costs low and attracts investment. A large and growing population also creates a domestic consumer market, so as incomes rise firms can sell at home rather than only exporting. The effect is conditional, not automatic: it delivers growth only if enough jobs are created and the workforce is educated, otherwise a youth bulge becomes unemployment. It is also temporary and unevenly distributed within the group: Russia's population is ageing and shrinking and China's working-age population has begun to fall, while Nigeria's and India's are still growing rapidly.

2. 2

   How have natural resources contributed, and what risks come with them?

   Model answer

   Resource exports supply foreign currency and government revenue that can fund infrastructure, industry and public services. Russia has oil and gas, Brazil iron ore, oil and agricultural land, South Africa gold, platinum and coal, Nigeria oil, Indonesia coal and palm oil, and Mexico oil and silver. These earnings rose steeply during the commodity boom of the 2000s, driven largely by Chinese industrial demand, and that boom accounts for much of the growth recorded in Brazil, Russia, South Africa and Nigeria in that decade. The risks are that world prices are volatile and outside the exporter's control, so revenue collapses when prices fall, as after 2014; that a resource boom raises the exchange rate and makes other exports uncompetitive; that extraction is capital-intensive and creates few jobs, forming an enclave with weak links to the rest of the economy; and that concentrated revenue is easily captured by elites rather than invested.

3. 3

   What part has industrialisation and the global shift of manufacturing played?

   Model answer

   Manufacturing has moved out of MEDCs and into lower-cost economies, a process usually called the global shift. It was made possible by containerisation and cheap air freight, which cut transport costs, and by information technology, which allowed a firm to coordinate production split across many countries. Emerging economies offered much lower labour costs, growing workforces and, increasingly, adequate ports and power. Countries typically began with simple assembly of clothing, footwear and electronic components and moved progressively into more complex and higher-value manufacture as skills and supplier networks developed. Industrial jobs pay more than subsistence agriculture, so this shift raises incomes, generates exports and drives urbanisation.

4. 4

   How important has foreign direct investment been, and how have governments attracted it?

   Model answer

   It has been central, because it supplies capital, technology, management expertise and access to the investing firm's global markets and distribution, none of which most of these countries could generate alone. Governments have competed for it by creating special economic zones and export processing zones with duty-free imports of components and streamlined customs, offering tax holidays and subsidised land, building the ports, roads and power supply investors require, liberalising rules on foreign ownership and profit repatriation, keeping exchange rates competitive, and in some cases requiring joint ventures with local firms so that technology is transferred. China's special economic zones from 1980 are the largest-scale example of this strategy.

5. 5

   What is meant by market liberalisation, and how has it driven emerging market growth?

   Model answer

   Market liberalisation means reducing state control of the economy: cutting tariffs and import quotas, removing licensing requirements on business, allowing foreign ownership and investment, privatising state enterprises, deregulating prices, and making the currency convertible. It has driven growth by allowing firms to import the inputs and machinery they need, exposing domestic producers to competition, and above all letting foreign capital in. Specific turning points include China's reform and opening from 1978 with special economic zones from 1980, India's reforms of 1991 which dismantled a restrictive industrial licensing system and cut tariffs, Mexico's entry into a North American free trade agreement in 1994, Turkey's customs union with the European Union in 1995, and China's accession to the World Trade Organization in 2001. In each case a measurable acceleration in trade and investment followed.

6. 6

   Why does investment in education and skills matter for an emerging economy's growth?

   Model answer

   Because cheap labour alone attracts only the simplest assembly work, which can move on to a cheaper country at short notice. A literate, numerate and increasingly technically trained workforce allows a country to move into more complex manufacturing, to absorb transferred technology rather than merely operate imported machines, and to develop its own firms. It also makes services possible: India's information technology and business services sector rests on a large supply of English-speaking graduates, which is why its growth took a different form from China's. Rising education levels also feed back into lower fertility, better child health and a stronger domestic market.

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