Down with “Emerging Markets”

LONDON – It has been nine years since I coined the acronym “BRIC,” which has become synonymous with the rise of Brazil, Russia, India, and China. It has been more than seven years since my colleagues at Goldman Sachs and I first published an outlook to 2050 in which we suggested that the four BRIC economies could emerge bigger than the G-7 economies, and, together with the United States, would constitute the world’s five largest.

It also has been more than five years since the expression “Next Eleven,” or “N-11,” first appeared. That term bracketed the next eleven largest countries by population, and sought to determine their BRIC-like potential.

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These 15 countries drive most of the positive momentum behind the world economy nowadays. China has overtaken Japan as the world’s second largest economy, with output roughly equal to that of the other three BRIC countries combined. Their aggregate GDP stands at around $11 trillion, or about 80% of the US level.

Domestic demand in the BRIC countries is even more impressive. The collective dollar value of BRIC consumers is estimated conservatively at just over $4 trillion, possibly $4.5 trillion. The US consumer market is worth more than double that – around $10.5 trillion – but BRIC consumer power is currently growing at an annual rate in dollar terms of around 15%, which means an annual rate of roughly $600 billion.

If this pace is maintained, BRIC consumers will be adding another $1 trillion to the global economy by the middle of this decade. By the end of the decade, they will be worth more than US consumers.

Indeed, at some point during this decade, the BRIC economies combined will become as big as the US economy, with China’s GDP alone reaching about two-thirds that of the US. The four countries will be responsible for at least one-half of real GDP growth in the world, and possibly as much as 70%.

Beyond the BRICs, among the likely top ten contributors to global GDP growth this decade are South Korea, Mexico, and Turkey. From the so-called developed world, only the US is guaranteed a place on this list – and the top 20 could include Iran, Nigeria, the Philippines, and Vietnam.

So how should we now think about the term “emerging markets”?

A few weeks ago, I decided with my colleagues to pursue the term “growth economies,” which Goldman Sachs adopted in 2010 to describe how we treat many of the world’s most dynamic markets. At its simplest, a growth economy should be regarded as one that is likely to experience rising productivity, which, together with favorable demographics, points to economic growth that outpaces the global average.

But an economy also needs sufficient size and depth in order to allow investors not only to invest, but also to exit when appropriate. So we opted for the following: any economy outside the so-called developed world that accounts for at least 1% of current global GDP should be defined as a growth economy.

At this size, currently around $600 billion, an economy should be large enough to allow investors and businesses to operate as they do in advanced countries, yet also be likely to grow faster. All other economies should continue to be defined as emerging markets. According to this definition, eight countries currently qualify: the BRIC countries, along with South Korea, Indonesia, Mexico, and Turkey, while others – including Saudi Arabia, Iran, Nigeria, and the Philippines – could join the list in the next 20 years.

It is also time that investors started to benchmark their portfolios more appropriately. In the past few decades, it has become conventional for equity investors to base their decisions on neutral benchmarks determined by the market capitalization of companies and indices. But this gives much more weight to the US economy and its companies relative to so-called emerging markets.

An alternative approach is to use a GDP-weighted benchmark. For bold and aggressive investors, a benchmark that incorporates future predicted GDP gives a lot more weight to emerging markets, especially to the growth economies.

The index that Goldman Sachs calculates every year for around 180 countries, called a Growth Environment Score (GES), is used to monitor productivity and the likelihood of sustainable growth. The index goes from 0 to 10, with 13 sub-indices for overall growth and productivity. Currently, for example, Korea’s GES is 7.5, compared to 6.9 for the US.

Economies that remain small and have low GES scores are appropriately treated as emerging markets with lots of risk. While they may grow significantly and escape from their current situation, they are vulnerable to adverse developments in core developed countries – especially the US – and in these countries’ financial markets.

Countries with low GES scores need to undertake policies that allow them to rise. For example, we forecast that within the next 20 years Nigeria, home to around 20% of Africa’s population, could account for 1% of global GDP. But its current GES score of 3.9 is significantly below the BRIC and N-11 average. On the other hand, Nigeria’s economy has almost doubled in size over the last 13 years. If it maintains this progress, before 2030 it will no longer be an “emerging economy.”

That would be an exciting development for Nigeria – and for Africa. Even more exciting is the likelihood that Nigeria will not be alone at its graduation into a growth economy.