How should emerging markets measure growth?

If China is set to become the largest economic entity in the world within the next 10 years, why is it still labelled as an “emerging market”? You may say this is because even though the country’s GDP in absolute terms is going to be largest in the world, it is still small on a per person basis. Others argue that while China (alongside with Brazil, Russia and India) has made substantial economic gains in the past two decades, less has been achieved in other areas.

From these answers, two things are clear. First, emerging markets (EM) would simply not be able to “emerge” through economic development alone – prosperity is brought along by both economic and social advancement. Second, the way we have been measuring performance is strictly from an economic perspective. Maybe we can forgive ourselves for subscribing to such a narrow view, as we tend to see improvement in standards of living as equal to economic growth.

The problem is that if we do not measure other performance aspects, we only have part of the equation. As Peter Drucker once put it, if something cannot be properly measured, it can’t be properly managed. This is where we are with the EM today: in a definitional limbo that does not fit the reality of their development anymore and far from an optimal level of management of their alleged development.

We are therefore in dire need of metrics that can move us away from the obsession with economic growth, which has only exacerbated the tragedy of the commons in many emerging countries. We have become accustomed to thinking that businesses must grow. We also have the habit of thinking that growth is a sign of strength and prosperity. And this does not only apply to businesses. Just observe politics, in which economic growth (and implicitly, job creation) has become the primary premise of electoral consent.

GDP focuses on economic growth. Markets should not be considered “emerging” or “emerged” based on this alone. A better way to measure how much countries have advanced is one that takes socio-economic performance into consideration. GDP as an indicator of socio-economic growth is at best a very poor indicator of such performance and at worst incapable of incorporating any considerations of sustainability and progress, when the measurement occurs in non-financial terms.

There are two better approaches than GDP. The first is called the Social Progress Index (SPI). More than just looking at the economic performance of countries, this new measurement takes into account the different aspects of our lives. As its name suggests, SPI measures social progress across building blocks of basic needs, foundations of well-being and opportunity, with each of them further broken down into four sub-categories that comprise several sub-indicators in each category. Countries are measured across 52 indicators in total.

SPI also co-relates the economic performance with social performance and highlights those contexts where economic growth has not led to social growth. Countries with high GDP on a per person basis have not necessarily progressed as much on other social aspects.

… but also for the “NEXT 11” (excluding Vietnam):

Source: SPI data is 2014 from The Social Progress Imperative; GDP per capita data I 2013 from The World Bank

Countries are ranked by SPI. The lighter colour bar represent the countries’ ranking for GDP per capita. For instance, even though the Brazil ranked 44 on a GDP per person basis globally, its level of social progression is higher compared to other countries (in 42nd position). Since some countries (such as Vietnam) have not yet been ranked by the SPI, they have also been removed from the GDP ranking for the purpose of comparison.

The second approach is Fast Expanding Markets (FEM), which looks at the problem from a completely different direction. Whereas GDP and SPI take the macro, top-down view, FEM works from the bottom up at the micro level. The concept of FEM helps us identify pockets of substantial growth and understand those social trends which stem from socio-behavioural perspectives and incentives.

These markets grow because of ingenuity and social drivers, which are conditions that spur a nascent demand. We argue that to identify FEMs, we have to set our sights forward – and hence quantitative analysis is ill-suited for the purpose as it focuses on what has already happened in the past.

To look into the future, managers would have to pay attention to discovering new ideas through a number of activities including reading widely, observing grassroots movements and taking an interest in local entrepreneurs, to name a few. Arguably, they may come across as ways that are both unguided and serendipitous. Yet, our research reveals that the process for identifying FEMs is far more systematic than it seems. To be more specific, there are three guiding forces: pain points, certain futures and field witnesses.

Pain points

Pain points as a means of discovery of new ways of doing business are nothing new. It has been argued that there are many benefits from identifying and eliminating (or at least easing) the emotional hot spots in customers’ lives. Identifying hassles entails companies seeing the world through the eyes and emotions of their customers. This may sound like ordinary business logic. Yet, few aviation executives experience what their customers do in the airlines that they run.

Certain futures

Some trends, bar the occurrence of catastrophic events such as outbreak of a global-scale war, are completely predictable. One of the most certain trajectories in the future is the size of various age segments as laid out clearly by the age pyramid. Another possibility is the rise in the amount of garbage. Perhaps less certain but still “unchangeable” are trends related to persistent wealth inequality and air pollution, or the increase in meat consumption in the Middle East and Asia.

Field witnesses

This refers to asking yourself: what are the “rights” or “wrongs” within the microclimates?

What we propose is a two-way approach, where SPI, co-related to GDP per capita, demonstrates the statistical insufficiency of each GDP dollar to reach a sustained progress in the EM, while FEM discovers the real nature of opportunities at the grassroots level, where the markets are located. The balance between macro measurements on progress and micro measurements on growth is the first step to assess inclusive growth. This latter is what the EM needs the most, if they want their emergence to be real.

Authors: Mark Esposito is an Associate Professor of Business & Economics at Grenoble Graduate School of Business in France, a Professor at Harvard University Extension School, and a Senior Associate at the University of Cambridge-CPSL (Twitter: @Exp_Mark). Terence Tse is Associate Professor in Finance at the London campus of ESCP Europe Business School (Twitter: @terencecmtse). 

Image: Laborers work on the scaffoldings at a construction site in Kunming, Yunnan province, December 22, 2014. REUTERS/Stringer