Connecting The Dots
Bangladesh -- a part of the 'Next 11'
Bangladesh received a number of foreign dignitaries from India, Japan and the United States last week. The positive attention it received in the international media could be summed up by an article in The Wall Street Journal which, referring to the Bangladesh trip by Secretary of State Hillary Clinton, concluded that "this weekend, a country once dismissed by former US Secretary of State Henry Kissinger as a basket case, gets to show one of his successors how wrong it has proven him."
This positive publicity for Bangladesh is not confined only to the political arena. Goldman Sachs lists Bangladesh among its "Next 11" (N-11), countries that have the potential to become major economies.
Today, I would like to comment on how the international investors view the emerging markets in general, and several groupings, in particular. It would be interesting to see how Bangladesh fares in their thinking.
A decade ago, Jim O'Neill, former head of Goldman Sachs Economic Research, had coined the term BRICs -- Brazil, Russia, India and China -- to explain how the rise of these countries might shape the world economy. It was expected that the higher growth in these economies could offset the impact of graying populations and slower growth in the advanced economies.
Over the last ten years, the rise of the BRICs and the emerging world has been one of the defining stories of the era. From contributing just one-fifth of global growth or less until the 1990s, the BRICs have contributed nearly half of overall global growth in the past decade.
This contribution is likely to hold at high levels for the BRICs. But in terms of the role of the BRICs in driving global growth, the most dramatic change is behind us. The bigger changes may now occur elsewhere.
There is more potential for other emerging market economies -- the N-11 and beyond -- to increase their role. So who are these N-11 countries? This grouping includes Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam.
While the N-11 countries share certain characteristics, they are not at the same level of economic development. I would categorise them in two sub-groups: countries in the first group have greater industrial capacity and are typically beginning to export heavy manufactured or refined products, while the second group is still largely reliant on primary exports, with some industrial capacity.
Of the N-11 countries, Bangladesh, Iran, Nigeria, Pakistan and Vietnam can be categorised in the second group, while all the others except South Korea can be categorised in the first group. South Korea is the only N-11 economy that could be categorised as a developed economy, owing to its high level of industrialisation and relatively stable macroeconomic fundamentals.
As the N-11 countries grow larger and their weight in the global economy increases, they would also become more important contributors to global growth. Of course, this depends on the continued ability of these economies to maintain the kind of growth conditions that would allow that shift. But the important story here is that there may be more room for non-BRIC emerging market economies to increase their global growth contributions than for the BRICs themselves.
Goldman Sachs and J.P. Morgan project that average growth rates in the N-11 could increase from 4% in the recent decade to 5% in the next decade, although this coming decade represents their peak potential too. Beyond that, as both the BRICs and N-11 economies move up the development curve, undergo their demographic transition and continue to converge to advanced economy levels, average growth rates are likely to decline steadily.
Why may that be the case? To understand this, consider decomposing the projected growth rates for the BRIC economies into their constituent factors -- capital deepening, growth in the labour force and productivity improvement. All these factors have pushed GDP growth rates higher in these economies.
In coming years, as labour force growth first slows and then in coming decades actually starts to shrink and detract from growth, the overall BRIC GDP growth rates would decline. And, increasingly, the BRICs growth story is likely to be dominated by continued capital deepening and productivity growth.
The same process plays out in the N-11 countries also, as shifts in the demographic structure of their population lower the contribution to growth from labour force expansion. But with the BRICs further ahead in this process, the N-11 may record faster average growth rates than the BRICs economies.
The recent interest in the N-11 countries among international policymakers and investors speaks to the imperative for these countries to sustain their recent better growth experience. Turning the dream of the N-11 into reality will not be automatic. Bangladesh, as part of the N-11, will find that translating that potential into actual growth is hard.
Over the years, factors have been identified that sustain growth -- including good educational outcomes, credible and stable institutions, rule of law, accountability and transparency, sound macro and microeconomic policies, openness, etc. The policy makers in Bangladesh will have to take that extra step to formulate policies to install the necessary factors in place that would help to utilise the economy's potential and take the country to the next step.