2020–Seven - AT Kearney

Transcription

Strategic Issue Assessment
“2020–Seven”
Growth Economies
August 2015
Seven emerging markets are positioned
to outperform their peers and offer the
greatest opportunities for business.
“2020–Seven” Growth Economies
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Strategic Issue Assessment Overview
The Strategic Issue Assessment (SIA) illuminates a crucial strategic issue from
several mutually reinforcing perspectives. Developed for Global Business Policy
Council (GBPC) members and their teams, each issue is selected based on member
input and the Council’s systematic scanning, filtering, and expert crowdsourcing
process. Each SIA integrates several analytical lenses, including Council research
and analysis, assessments of A.T. Kearney industry and functional experts regarding
business implications, and extensive knowledge and insight from one or more
leading subject-matter experts.
The intent is to provide a forward-looking deep dive into an issue of clear global,
cross-industry importance for business leaders.
The report is divided into three sections: An issue overview describes the predominant challenges and the stakes addressed in the assessment. Subject-matter
expert interviews provide perspective from featured authorities. And the conclusion
and business implications consolidate our findings and present a final analysis
on the issue.
Table of Contents
Executive Summary
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Introduction3
Section I: Issue Overview
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2020–Seven methodology
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Economic indicators
6
Business growth facilitators
13
Policy factors 19
Global trends 25
Section II: Subject-Matter Expert Interviews
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Section III: Conclusion and Business Implications
37
Executive Summary
China, Malaysia, Chile, Poland, Peru, Mexico, and the Philippines are positioned to
outperform their peers and play a greater role in the world economy through 2020.
• The GBPC identified these countries—the “2020–Seven”—using a proprietary methodology
that weighs a broad range of economic indicators, considerations of business ease and
governance, and measures of resilience to global macroeconomic volatility.
• It is no coincidence that six of these seven countries border the Pacific Ocean, the new locus
of the global economy.
Malaysia, Poland, and Mexico particularly stand out for the business opportunities they
present.
• Malaysia would uniquely benefit from a finalized Trans-Pacific Partnership (TPP) free trade
agreement because of its role in regional and international value chains, in addition to its
competitive advantage in high-technology manufacturing.
• Poland is ascendant as the value chain hub for German exports, and it is making infrastructure
investments at the right time to take advantage of this position.
• Mexico’s ambitious economic reform agenda has opened the country up for greater competition and private investment—particularly in energy and high-value-added manufacturing—
at a time of growing North American global competitiveness.
China faces mounting challenges as it adjusts to the “new normal” of lower economic
growth, but defies confident prediction because of its market size, complexity, and unique
system of political and economic governance.
• President Xi Jinping and other fifth-generation leaders must rapidly transition the country to
consumption-led growth, reducing the role of state-owned enterprises while avoiding
a banking crisis tied to local debt and inflated real estate prices.
The 2020–Seven are not immune to global currency and commodity dynamics likely to roil
emerging markets in the coming years, and many also face internal political challenges.
• With the global economy in a “new mediocre” phase of stable but lower growth, the lowhanging growth drivers have been exhausted. Therefore, governments must tackle structural
reforms to achieve their full economic potential.
• In particular, Chile and Peru risk seeing the economic gains of the previous decade slip
from their grasp if they cannot continue to diversify their commodity-dependent economies,
attract capital to make needed infrastructure investments, and support their leaders even as
they enact reforms.
• The economic potential of the Philippines hinges on its next political transition in 2016, with
continued growth most likely if President Benigno Aquino’s successor continues his anticorruption and business-friendly policies.
The 2020–Seven will look to foreign investment to help diversify and develop their
economies, presenting opportunities for multinational companies.
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Introduction
Global business executives have put the last financial crisis behind them, but the path forward is
uncertain. The rules of the game in today’s macroeconomic environment are shifting quickly in
developed and emerging markets alike, and sound business strategy requires an understanding
of global macro trends, as well as regional and country dynamics.
As part of its Global Economic Outlook 2015–2020, the Global Business Policy Council (GBPC)
developed a unique framework to assess which emerging markets are likely to provide the best
growth opportunities. This methodology identifies what we have labeled the “2020–Seven”—
the seven key emerging markets that are poised to outperform their peers and play a greater
role in the world economy through 2020. This Strategic Issue Assessment (SIA) explores those
countries in greater detail in order to tease out the business opportunities they present relative
to other emerging markets and highlight some of the challenges that these high-potential
economies face.
Strong leadership and bold government
actions will determine whether national
economies can escape from the “new
mediocre” of stable but low growth.
In the coming years, economic performance will continue to diverge within both developed
and emerging market groupings based on key policy choices, as governments grapple with
structural reforms in the context of reduced fiscal and monetary policy stimulus. Governments
have exhausted the easy options and must now discuss the more difficult ones. In this regard,
strong leadership and bold government actions will determine whether national economies
can escape from what IMF Managing Director Christine Lagarde has called the “new mediocre”
of stable but low growth.
Importantly, the United States is returning to steady growth. But it is virtually alone among
major developed economies in doing so. Europe has yet to fully address the core sources of its
ongoing financial and economic fragility, and Japan’s continued economic recovery will be
determined by whether the government undertakes structural reforms in 2015—an uncertain
prospect given domestic political constraints. Emerging markets are experiencing a slowdown
driven by near-term cyclical and long-term structural factors, with shifting monetary policy in
the world’s largest economies heightening uncertainty.
For emerging-market policy makers, the challenge is to fight off the dreaded middle-income
trap and continue to improve productivity, living standards, and public services. As the dust
settles from the global financial crisis and the global economy enters a new phase, an important
shift is taking place away from most of the BRICS—Brazil, Russia, India, China, and South
Africa—as the key emerging-market growth drivers.
The race is on to find the next wave of emerging growth economies, but these are proving
stubbornly illusive. The GBPC is presenting the 2020–Seven as one such grouping of emerging
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growth economies. These seven economies are diverse in terms of size, industry composition,
geography, and many other factors. And they are by no means a sure bet—each has strong
potential to outperform its peers, but each also faces its own set of unique policy challenges.
For multinational businesses operating in a “new mediocre” world, it will be important to
analyze country-specific economic and policy factors benchmarked on a global basis to
determine which markets will provide the best growth opportunities in their industry.
This paper analyzes the 2020–Seven in three sections. In the first, it presents the 2020–Seven
methodology, explores in detail the various economic, business growth facilitator, and policy
dynamics affecting the 2020–Seven, and then interjects three key global trends to further
stress-test the five-year outlook for the 2020–Seven. The second contains an interview of three
leading regional expert economists who discuss these countries’ economic prospects. The final
section offers a summary conclusion of the paper’s findings and draws out the implications for
global business leaders.
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Section I: Issue Overview
2020–Seven methodology
To identify the emerging markets most likely to enjoy strong economic growth between 2015
and 2020—and thus provide the greatest business investment opportunities—the GBPC
examined the 25 largest emerging markets, as measured by the size of the economy, population,
and per capita GDP at purchasing power parity (excluding those with GDP per capita above
$25,000). The GBPC then analyzed those markets across eight key factors in order to determine
growth prospects through 2020 (see figure 1). This analysis goes beyond simply comparing GDP
and related economic forecasts, which tend to be volatile. GBPC analysis included structural
factors that position markets to withstand unforeseen economic shocks and foster longer-term
economic growth and stability.
Figure 1
A framework for evaluating the growth potential of emerging markets
2020–Seven selection criteria
Economic
indicators
Business growth
facilitators
Policy factors
Indicator
Factors
Size of economy
Measures of real GDP, population, and GDP per capita
Economic performance
Projections of real GDP growth and productivity growth
Economic imbalances
Internal and external imbalances including inflation,
government debt, and current account balances
Economic resilience
Level of international reserve assets and government
budget balance
Labor force
Size and quality of labor force including working age
population, literacy rates, and urbanization rates
Infrastructure
Physical infrastructure including telecommunications, rail,
seaports, and airports
Regulations and
governance
Assessment of the business regulatory environment,
government transparency, and overall quality of governance
Structural reform
agenda
Status of economic regulations—such as those governing
the financial sector, the design of the social safety net,
and the labor market—and any proposed or recently
implemented changes
Source: A.T. Kearney analysis
Half of the metrics in the 2020–Seven analysis relate to economic factors:
• Size of the country’s economy captures not only the size of these economies today but also
their expected size in 2020.
• Economic performance forecasts GDP growth and productivity growth rates through 2020.
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• Economic imbalances examines both internal imbalances (such as inflation, government
debt, and domestic credit) and external imbalances (such as the current account and external
debt, which could cause a dislocation or crisis in a particular sector or in the economy at large).
• Economic resilience measures how well a country could respond to an economic imbalance
or an external shock by taking into account factors such as the projected fiscal balance in the
coming years and the government’s level of international reserve assets.
The GBPC then analyzed the quality of two categories that are important facilitators (or impediments) of economic growth and business opportunity in emerging markets:
• Labor force analyzes factors such as the working age population, literacy rates, and urbanization in order to assess labor availability and quality.
• Infrastructure measures the presence and quality of communications, transportation, and
other types of infrastructure.
Finally, the GBPC analyzed two policy factors in its 2020–Seven growth markets analysis:
• Regulations and governance captures the degree to which government regulations, such as
those governing labor relations, paying taxes, and other necessary business operations, are
designed to make compliance easy and low-cost from the perspective of businesses. It also
measures the overall quality of governance and transparency, taking into account how factors
such as corruption and political stability can affect economic activity.
• Structural economic reform agenda analyzes whether current policies and proposals enable
a country’s economy to be more responsive to market forces and thus allow businesses to
operate based on core market dynamics rather than policy-driven distortions.
Based on this framework, the GBPC identified the 2020–Seven markets as standouts in terms of
economic growth and business opportunity prospects in the near to medium term (see figure 2 on
page 7). In fact, the 2020–Seven markets are forecast to outpace other key economy groupings
through 2020 (see figure 3 on page 7). The following sections examine these three categories of
variables in greater depth for each of the 2020–Seven economies. Each section is organized
from the highest to lowest average scores within each category.
Economic indicators
The market sizes of the 2020–Seven vary widely, from China’s—by some measures, the largest
economy in the world—to Peru’s, the smallest economy among this group (see figure 4 on page
8). All 2020–Seven economies are at least moderately well positioned to respond to economic
crisis due to weaker economic imbalances than many other emerging markets and a higher
resiliency to external shocks. That last point is key. In addition to the foundational strength of
their economies, the ability to weather domestic or external shocks matters significantly in light
of current global macroeconomic volatility. Underlying imbalances can lead to economic
dislocation or crisis in a particular sector or in a country’s wider economy, and they can add
to the risk of doing business in a particular country. Overall economic resilience requires
addressing issues ranging from balanced budgets to international reserve assets and policies
that allow flexibility in crisis (see figure 5 on page 9).
In 2014, China became the world’s largest economy in terms of GDP at purchasing power parity.
Following decades of extraordinary double-digit growth, the country is now entering a new
stage of development and targeting “new normal” growth rates that are lower but, its leaders
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Figure 2
The next wave of emerging growth markets
The 2020–Seven growth economies analysis
Scores
Very low
Size of
economy
Economic
Economic
performance resilience
Low
Moderate
Economic
imbalances
High
Very high
Labor
force
Infrastructure
Regulations
and
governance
Reform
status
Growth
market
China
Malaysia
Chile
Poland
Peru
Mexico
Philippines
Indonesia
Turkey
Colombia
Romania
Thailand
India
Kazakhstan
South Africa
Nigeria
Hungary
Brazil
Iran
Russia
Argentina
Pakistan
Algeria
Egypt
Venezuela
Note: This analysis was performed in December 2014 and was originally published in the Global Economic Outlook 2015–2020.
Sources: Economist Intelligence Unit, International Monetary Fund, World Bank, World Economic Forum, United Nations; A.T. Kearney analysis
Figure 3
The 2020–Seven markets are poised to outpace the growth of other key economic groupings
Real GDP growth (annual percentage change)
8
2020–Seven
7
G7
6
BRICS excluding China
5
World
4
3
2
1
0
2010
2011
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
2020f
Notes: The G7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. BRICS are Brazil, Russia, India, China, and
South Africa.
Sources: IMF World Economic Outlook; A.T. Kearney analysis
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Figure 4
China is the largest of the 2020–Seven economies on most measures, but lags on income
per capita
Varying measures of economy size
1
1
Real GDP (US$)
2 Real GDP growth
3 Real GDP (PPP)
4 Population
5 GDP per capita (US$)
5
Chile
China
Malaysia
Mexico
Peru
Philippines
Poland
2
4
3
Notes: All measures of economy size are based on the average values of 2015–2020 forecast data. PPP is purchasing power parity.
Sources: Economist Intelligence Unit, A.T. Kearney analysis
argue, more sustainable. Over the next five years, Beijing will seek to continue the transition
from lower-value goods and services to higher-value and high-tech products. Manufacturing
industries to watch during this period include automobiles, computer software, and higherquality garments and textiles. Consumption has already become the main driver of growth in
China, accounting for 51.2 percent of overall growth in 2014, up from 48 percent just one year
earlier. China also experienced a healthy wage growth of almost 8 percent last year, which
helped drive this higher private consumption. As the economy continues to move to an increasingly free-market model, China’s GDP per capita is expected to increase to an average of almost
$18,000 by 2020, up from just $5,000 in 2005. However, relative to its sheer market size, China’s
GDP per capita remains relatively small. Despite historic growth, more than 82 million Chinese
still live below the poverty line, and almost 50 percent of its population still lives in rural areas.
And in order to sustain the “new normal” rates, China will also need to invest more in the service
sector, as well as continue to take steps to address its aging population and high saving rates.
China is positioned to weather an economic crisis, but may need to make painful fiscal adjustments in order to do so. China’s foreign exchange reserves are exceptionally high, at almost 40
percent of its GDP and 400 percent of its external debt. Government budget deficits are rising,
however, as China’s economic growth slows and the government expands social services and
military spending. The most worrying imbalance is the rising level of debt, particularly by local
governments and nonfinancial corporations. Many state-owned enterprises and local governments borrow through China’s growing shadow banking industry, leaving them without financial
safeguards in the event of a crisis. Although this rise in credit is helping to boost China’s GDP at
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Figure 5
Chile, Peru, and the Philippines are particularly well positioned to respond to crises
2015 projected government finances (percent of GDP)
Government budget deficit
4.5
Mexico
4.0
Malaysia
3.5
Poland
3.0
2.5
Chile
China
Peru
2.0
1.5
Philippines
1.0
0.5
0.0
10
20
30
40
50
60
Government debt
a time when growth is decelerating, it risks sparking a banking crisis and recession. As local
government borrowing surges, China will need to address the weaknesses in its credit system.
The Philippines has come a long way from being labeled “sick man of Asia” and is now an
important economic player in Southeast Asia and, increasingly, the world. Since the turn of the
century, the Philippines’ economy has grown by more than 65 percent, surpassing both Chile
and Peru in size. However, the Philippines has the lowest GDP per capita among the 2020–Seven,
recording high poverty rates. Approximately 25 percent of Filipinos live under the national
poverty line, the same proportion as 15 years ago. This constrains Philippine economic growth
by limiting households’ spending power and, thus, domestic demand levels. While the Philippine
government is confident that the country’s per capita income will improve, it needs to increase
spending on infrastructure, improve decades-old economic and social policies, and modernize
its financial institutions to spread the benefits of economic growth and lift millions out of poverty.
One of the key strengths of the Philippines’ economy—and the reason that it is among the
strongest economic performers in the 2020–Seven—is its global business services sector, which
is one of the most sophisticated in the world. Countless companies operate centers there,
primarily in central Luzon. As highlighted in the 2014 A.T. Kearney Global Services Location
Index, the Philippines is now expanding from its traditional strength in call centers into higher
value-added voice services, IT, and business process outsourcing (BPO) offerings.
The Philippines has run current account surpluses since 2003, and these surpluses are forecast
to further increase because of low oil prices and continued strong inflows from overseas workers’
remittances and from the business services and tourism industries. Recent decreases in global
food and energy prices have also been a positive development, slowing the rate of inflation from
4.2 percent in 2014 to a forecast 3.0 percent in 2015. After weakening in 2014, the Philippine peso
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recently strengthened against the U.S. dollar and is expected to remain relatively stable in 2015.
Conscious of its past vulnerability to regional and international financial crises and fluctuations,
the Philippines has increased its foreign exchange reserves over the past five years, reaching
record highs in 2013 and currently holding reserves worth more than $80 billion. Since 2012, the
Philippine government has also made progress in reducing its budget deficits. If the government
can stay this course when a new administration takes power in 2016, the country will be well
positioned to overcome future economic shocks and crises.
Peru is the smallest market among the 2020–Seven, largely due to its modest population size.
In addition, its economy is relatively undiversified, largely relying on commodity exports for
economic growth—much like its southern neighbor and fellow 2020-Seven member, Chile
(see figure 6). In Chile, copper provides almost one-third of its GDP, while metals and minerals
constitute Peru’s top five exports and account for more than 50 percent of its total outbound
trade. As a small, open economy, Peru is vulnerable to global developments and external
shocks, such as the recent drop in the global prices of metals and oil. The government has taken
steps to diversify its economy, but much remains to be done to foster more sustainable
economic growth.
Figure 6
Commodities dominate Chilean and Peruvian exports, while the rest of the 2020–Seven
primarily export manufactures
Exports by category (percent of total merchandise trade)
Chile
27.1
Peru
17.0
Malaysia
Mexico
Philippines
Poland
China
58.7
51.6
13.2
6.6
11.7
25.5
60.7
15.9
11.3
14.1
74.9
9.8
73.4
9.0
3.2 2.7
Agricultural products
13.3
76.7
94.0
Fuels and mining products
Manufactures
Note: Figures may not add up to 100 due to other types of exports in addition to these three categories.
Sources: World Trade Organization, Trade Profiles; A.T. Kearney analysis
Domestic demand and modernization in the service and industry sectors, which respectively
account for almost 60 percent and 35 percent of Peru’s GDP, have been the main drivers of
growth in recent years (apart from the commodities sector). But the government still faces
challenges to increase competitiveness and modernize the economy. According to the World
Bank, Peru has successfully reduced its national poverty rate by more than half, falling from 56
percent to 24 percent in just eight years. However, much more action is needed to further
alleviate poverty and adequately train and tap into the country’s workforce. Peru’s biggest
challenges are its low productivity levels and limited capacity for innovation-led growth. There
are very few science, technology, engineering, and math (STEM) graduates, for instance, and in
2013, Peru invested only $17.4 million in science and technology R&D. According to the World
“2020–Seven” Growth Economies 10
Bank, if Peru’s spending in these areas remains insufficient, it will stymie its economic diversification efforts and its ability to withstand external shocks.
Peru has shown consistent fiscal discipline since reaching an agreement with the IMF to avoid
default in 1998. In six of the past 10 years, the government has run a budget surplus, and Peru
has also cut its public debt by more than half over the past decade. Thanks in part to these
strong government finances, in July 2014 Moody’s raised Peru’s sovereign rating two levels, from
Baa2 to A3. Peru is also well positioned to weather an external shock, with a floating currency
and $16.3 million in international reserves. However, a few risk factors remain, including high
financial dollarization. Peruvian banks hold high proportions of liquid assets and credit to the
private sector in foreign currency—about 38 percent and 42 percent respectively at the end of
2013—making Peru vulnerable to foreign monetary policy, particularly that of the United States.
Similarly to Chile, falling copper prices and slowing demand in China will continue to negatively
impact Peru’s current account balance, with the Economist Intelligence Unit projecting trade
deficits for Peru through 2018.
The ability to weather domestic or external
shocks matters significantly in light of
current global macroeconomic volatility.
Another commodity-rich country among the 2020–Seven is Malaysia, but it has successfully
developed a more diversified economy. Malaysia continues to produce many raw materials
and is the second-largest oil and gas producer in Southeast Asia (behind Indonesia). Yet, it was
able to weather plummeting oil prices in 2014 largely due to its high-value exports, including
electronics parts, integrated circuits, and computers, which account for 35.5 percent of its
total exports. As Malaysia attempts to become an advanced economy by 2020, it will continue
to diversify and produce more high-value goods and services in non-raw material sectors.
Furthermore, the government is prioritizing innovation-led and sustainable growth. For example,
the government is aiming to attract more investments in medical devices, pharmaceuticals,
and higher quality healthcare services for an aging global society. In doing so, it builds on the
country’s already highly skilled medical labor force and good healthcare infrastructure to
encourage the further growth of healthcare services and medical tourism. Tourism, which has
increased 12 percent annually since 2004, will also play a significant role in Malaysia’s economy.
Malaysia now attracts more than 26 million visitors every year, and the government expects the
number of tourists to reach 36 million by 2020. In addition, the country has a strong domestic
consumer market that helps to sustain its steady growth.
Malaysia’s diverse economy, sound business regulations, and flexible monetary policy help it
to anticipate and avoid crises. However, the country’s international reserves are low, projected
at just 1.1 times the country’s short-term external debt, more than half of which is denominated
in foreign currency. Although Malaysia is running a current account surplus, its international
reserve levels could fall quickly if the Malaysian ringgit weakens further. As a result, the government is prioritizing stable finances over growth and plans to cut govern-ment spending this
year, specifically the budgets for travel, corporate grants, and mandatory military service.
Malaysia will need continued fiscal discipline and economic diversification to ride out a further
shock in commodity prices.
Mexico is the second-largest economy
among the 2020–Seven, owing to its oil and
gas sector, the growing diversification of its
manufactured exports, and relatively high
GDP per capita. While Mexico’s economy has
long relied on its energy sector for a large
portion of its growth, oil extraction volumes
have been falling in recent years, a problem
that the recent opening to foreign investment
may help to resolve. Valued at almost $46
billion annually, crude petroleum remains
Mexico’s leading export, but machine manufacturing in the country’s north—increasingly
including automobiles, computers, video
displays, and telephones—is now valued at
more than $124 billion. The strength of this
sector is due in no small part to Mexico’s
membership in the North American Free
Trade Agreement (NAFTA), of which the large consumer markets of the United States and Canada
are also members. Moreover, Mexico has bilateral and multilateral free trade agreements (FTAs)
with more than 50 countries, including Japan, Israel, and many of its southern neighbors.
Although Mexico has successfully diversified its exports over the past decade, the Mexican
government still relies on the oil industry for almost a third of its revenue. Falling global oil
prices directly impact the government’s ability to balance its budget and develop unconventional oil supplies to keep pace with its North American neighbors. As a result, the government
may struggle fiscally over the next few years, leading to an increase in its debt level. However,
Mexico has abundant international reserves ($192.9 billion as of January 2015). In addition,
Mexico’s weakening currency has helped to mitigate the sharp drop in oil prices last year by
making its exports more competitive. In fact, Mexico’s current account deficit is expected to
average 1.7 percent of GDP over the next four years, which is better than most other large
emerging economies.
Chile has many economic traits in common with Peru—including a relatively small population,
high dependence on commodity exports, and an open economy—but one area in which these
two economies differ is in purchasing power. Compared to Peru, Chile has a notably higher GDP
per capita—due to its stable political environment over the past couple of decades, strong
financial institutions, high-quality international trade facilities, and commitment to poverty
reduction. In fact, Chile’s income per capita has grown strongly in recent years, while poverty
has fallen significantly from 23 percent in 2000 to just 9.9 percent in 2011. However, the Chilean
economy is not as innovative as it could be: current research and development (R&D) investments are below 0.5 percent of GDP, compared to an OECD average of 2.3 percent. To address
this, the government has introduced tax credits to encourage more private R&D investments.
However, various bottlenecks, including a shortage of highly skilled and educated labor and a
lack of industry diversification in the mineral-dependent economy, have limited Chile’s ability to
boost innovation and thus further diversify its economy. One development that could help both
Chile and Peru to diversify and boost growth in the near term would be finalizing and implementing the Trans-Pacific Partnership (TPP).
Chile has the strongest sovereign bond rating in South America, and its central bank holds
foreign exchange reserves worth $40.5 billion, enabling the government to soften currency
fluctuations during a crisis. Chile’s current account and fiscal balance are negatively impacted
by falling commodity prices, however. For every one-cent drop in copper prices, Chileans lose
an estimated $60 million in income. Moreover, as Chinese demand for commodities continues
to fall, Chile may find fewer external markets and therefore be vulnerable to further declines in
copper revenue. The government plans to boost spending in order to counteract sluggish
growth. Although this move could exacerbate fiscal imbalances, the budget deficit remains
below 2 percent of GDP, so the government has room to maneuver.
Poland, along with Malaysia, is in the middle of the 2020–Seven in terms of economic size
but has the highest GDP per capita. Poland continues to offer a stable environment for foreign
companies to invest, and as such attracts significant foreign direct investment (FDI). According
to Ilona Antoniszyn-Klik, a deputy state secretary in Poland’s Ministry of the Economy, the number
of investment projects in Poland is the highest of any European country, especially in BPO,
shared services centers, IT, and aerospace. This is due in large part to the country’s low labor
costs, stable financial sector, and strong relationships with key economies, such as Germany.
However, the economy’s growth prospects beyond the five-year time frame will depend on
whether significant investment is made to transition to a higher-technology economy. This would
include modernizing outdated infrastructure, boosting R&D spending, and improving labor
skills. In 2013, R&D investments were less than 1 percent of GDP, compared to an average of
2 percent spending among other EU countries.
Poland’s strong economic fundamentals—a sound regulatory framework, stable interest rates,
serviceable deficits, and flexible currency—enabled it to weather Europe’s recent financial
crises better than almost any of its neighbors. The Polish government has improved its ability to
respond to future crises by successfully reducing its budget deficit by more than half since
2010, from 3.2 percent to 1.7 percent of GDP in 2014. In fact, Poland’s public debt is also below
the EU average. The country’s foreign exchange reserves are also ample, at more than $97
billion, though these levels have fallen since late 2014 as Poland has propped up its currency.
More concerning is the fact that much of Poland’s external debt, particularly private mortgage
debt, is denominated in Swiss francs. As the zloty weakens, the Swiss franc has surged since
Switzerland delinked from the euro in January, steeply increasing the amount that Polish
homeowners owe on their mortgages.
Business growth facilitators: labor force and infrastructure
As the next key emerging markets, the 2020–Seven have significant potential to play a greater
role in the global economy, in part due to their strong labor force dynamics. However, the
2020–Seven will grapple with various challenges in their labor markets over the next five years,
including skills gaps, aging populations, labor shortages, outward migration of talent, and
increasing numbers of youth entering the labor market. For instance, the governments of Chile,
Mexico, and Peru have all introduced new, but controversial labor reforms to update their
decades-old approaches and try to improve productivity. Malaysia and the Philippines, on the
other hand, must find a way to employ the large numbers of educated young people that are
entering the workforces in those countries. In contrast, China and Poland face a longer-term
challenge of aging populations and the need to improve productivity in order to sustain
economic growth with smaller labor forces.
Reliable and efficient physical infrastructure—including roads, railways, ports, power grids,
telecommunications systems, and water and sewage systems—is necessary for a modern
economy to function. High-quality infrastructure enables the efficient production and transportation of goods within an economy and through external trade, and also supports service sector
activities. The 2020–Seven economies have relatively good infrastructure compared with
emerging markets as a whole (see figure 7). However, infrastructure requires constant maintenance to ensure that it continues to perform well. In addition, new infrastructure development is
essential for each of the 2020–Seven to keep pace with the demands of their fast-growing
economies. Limited infrastructure can hinder strong economic growth by keeping productivity
low, preventing available workers from entering the formal labor sector, and deterring
investment flows. Most of the 2020–Seven governments have already introduced reforms to
modernize their infrastructure, or have ambitious national plans to do so, but implementation of
these plans will require significant, sustained investment over the next five years.
Figure 7
Infrastructure is a key advantage of the 2020–Seven compared with other
emerging markets
Logistics Performance Index
Scale of 1–5 (5=high)
Overall quality of infrastructure
Scale of 1–7 (7=high)
Malaysia
3.6
Malaysia
China
3.5
Chile
Poland
3.5
China
Chile
5.6
4.7
4.4
3.3
Mexico
4.2
Mexico
3.1
Poland
4.0
Philippines
3.0
Philippines
3.7
Emerging markets
3.6
Peru
3.5
Peru
2.8
Emerging markets
0.0
2.6
1.0
2.0
3.0
4.0
0.0
1.5
3.0
4.5
6.0
Note: Emerging market average is based on the scores for lower- and middle-income countries
Sources: World Bank, World Economic Forum; A.T. Kearney analysis
In aggregate, Chile performs well on labor market dynamics (see figure 8 on page 15).
However, Chile has a small population, and some of the changes that the administration of
President Michele Bachelet proposes to the 35-year-old labor laws worry business leaders.
In December 2014, Bachelet proposed a new labor code to give unions more bargaining power,
introduce more flexibility to train union members, and protect striking workers from being
replaced. The goal of these proposed changes is to address rising income inequality in the
country, which is the worst among OECD countries. Many Chilean businesses, on the other
hand, argue the proposed reforms give too much power to already influential union leaders.
Mining companies in particular are concerned that the reforms will increase labor costs and
further delay investments in a sector that has been negatively affected by the ongoing
commodity slump.
Figure 8
Chile has the most favorable labor market dynamics of the 2020–Seven economies
Labor market dynamics
Working age
population
(% of total)
Urban
population
(% of total)
Female
literacy rate
(%)
Unemployment
(%)
Labor market
efficiency
(1–7, 7=high)
Chile
68.9
89.5
98.5
6.4
4.4
China
72.4
55.6
71.3
4.1
4.6
Malaysia
69.0
74.7
90.7
2.9
4.8
Mexico
65.8
79.2
93.2
4.7
3.7
Peru
65.3
78.6
90.7
6.0
4.3
Philippines
62.5
44.4
95.8
6.8
4.0
Poland
69.6
60.5
99.6
9.0
4.1
Sources: World Bank Worldwide Development Indicators, UN Population Division, IMF World Economic Outlook, World Economic Forum Global
Competitiveness Report; A.T. Kearney analysis
Chile has a fairly well-developed infrastructure, particularly compared to that of its neighbors,
ranking 49 out of 144 countries in overall infrastructure according to the World Economic
Forum’s 2014 Global Competitiveness Index. However, the government has correctly identified
that further investment will be needed to remain globally competitive. In July 2014, President
Bachelet introduced a National Infrastructure Plan to invest $28 billion by 2021 and increase
public infrastructure spending from 2.5 percent to 3 percent of GDP. The reform includes $9.9
billion to implement public-private partnerships and expand Santiago’s international airport, and
$18 billion for public works projects, such as desalination plants, highways, reservoirs, and the
paving of rural roads. Although these plans are ambitious, the Chilean Construction Chamber
(CCC) warns that the government will need $58 billion of investment in the next four years to fix
current infrastructure problems, including $22 billion for road and urban transportation improvements alone. The CCC report also recommends that the Chilean government should establish
a national infrastructure agency to oversee projects, track the progress of national plans, help
create more public-private partnerships, and attract private sector investments.
Malaysia’s labor force is well-educated, and the country’s diversified economy means that there
are a variety of skills available to employers. In addition, Malaysia scores highest among the
2020–Seven economies on the World Economic Forum’s measure of labor market efficiency.
However, the migration of talent could have devastating effects on the economy. Over the past
decade, an estimated 300,000 Malaysians with tertiary degrees have left the country to seek
better opportunities, with a majority immigrating to Singapore, followed by Australia, the United
Kingdom, and the United States. Ethnic Chinese and Indians, which respectively comprise
24 percent and 7 percent of Malaysia’s population, cite a national policy that favors the Malay
majority over ethnic minorities as one of the reasons to move overseas. As these policies continue
to exclude more than a quarter of its population and many of the most educated Malaysians
continue to leave, it may be more difficult for Malaysia to attract foreign companies seeking
an educated and skilled workforce.
Among the 2020–Seven markets, Malaysia has been the most successful at modernizing its
infrastructure, placing 15th out of 144 countries globally in overall infrastructure and ranking
the highest among the East Asia and Pacific countries on the World Economic Forum’s Global
Competitiveness Index. The country plans to continue investing heavily in its infrastructure
under Prime Minister Najib Razak’s numerous initiatives to attain high-income status by 2020.
One such initiative is the Economic Transformation Programme (ETP), which includes communication infrastructure plans to provide fixed, mobile, and broadcast services that ensure all
Malaysians have access to the Internet. However, the government in Kuala Lumpur has been
criticized for not efficiently managing ETP projects to attract adequate private company
competition and build public-private partnerships.
With a working-age population of more than
1 billion people, a rapidly urbanizing population, and experience with a wide array of
manufacturing sectors, China offers an
attractive labor force to both domestic and
foreign companies. In addition, China scores
second-highest among the 2020–Seven on
the World Economic Forum’s labor market
efficiency measure. But while China’s working
age population is currently 72 percent of its
total population, its workforce has actually
been declining in size since 2011—a trend that
will accelerate further due to a rapidly aging
population. The population over the age of
65 will increase from 9.5 percent in 2015 to
almost 12 percent by 2020. In the long term,
the Chinese Communist Party will need to
introduce significant labor reforms and
policies to encourage families to have more children, for example by continuing to reform its
family planning laws. China may also need to follow in the footsteps of other rapidly aging Asian
countries and introduce pronatalist policies such as parental leave, housing assistance, and
daycare programs. In the interim, Beijing could introduce additional reforms in its hukou household registration system to allow for greater labor mobility, as the current rules create numerous
challenges for people who migrate to urban areas for job and education opportunities. An
estimated 260 million people are part of China’s “floating population,” internal migrants who
live in urban areas but do not have household registration in Chinese cities. Although Beijing
introduced reforms in 2014 to remove the difference between “urban” and “rural” residents and
to allow 100 million people to register in cities over the next six years, many experts argue that
these limited reforms will not alleviate existing challenges.
Over the past couple of decades, China’s infrastructure has improved dramatically as its
economy has rapidly grown and integrated into the world economy. For instance, in 1990 only
818 million tons of freight were transported by air in China, but this number soared to more than
16 billion tons in 2013. Similarly, China’s railway system has grown 25 percent since 1990, from
about 53,000 kilometers to 66,000 kilometers in 2013. And in only the past decade, China’s
score on the World Economic Forum’s measure of overall infrastructure quality has risen from
3.3 to 4.4 out of 7.0. Although economic growth is projected to weaken and infrastructure
spending has decreased over the past several years, the Chinese government continues to
support infrastructure development. In early 2015, Premier Li Keqiang approved 300 infrastructure projects worth $1.1 trillion in several industries, including oil and gas, transportation,
clean energy, and mining, as well as the construction of more roads and a third airport in Beijing.
Although such projects may boost economic growth in the short term and foster additional
growth in the medium to long term, China’s lofty infrastructure ambitions—including building
the world’s longest underwater tunnel for $36 billion, the world’s largest bridge, the longest gas
pipeline, and an $80 billion, 2,400-kilometer water diversion project to carry supply to the
water-scarce north—also entail major financial, social, and environmental risks. Already,
numerous industrial parks, shopping malls, housing units, and even entire cities have been
abandoned due to inaccurate demand projections. The vacancy rate for housing has been
15 percent over the past five years and is expected to increase to 20 percent by 2017. There could
be enormous long-term benefits from these projects as the country becomes increasingly
urbanized, but the government should more thoroughly examine both the costs and benefits
before investing in infrastructure projects as economic growth rates slow in the coming years.
Most of the 2020–Seven governments
have already introduced reforms to
modernize their infrastructure, or have
ambitious national plans to do so.
Mexico has a workforce capable of higher value-added production that competes directly
with East Asian workforces. With access to cheap and plentiful North American energy, nearshoring of manufacturing in Mexico is increasingly attractive to businesses looking to export
to the Americas and beyond. However, up until very recently Mexico’s labor laws had remained
unchanged since the 1970s, failing to reflect the needs of today’s workers and businesses.
Mexico’s labor code provides few rights to women in the workforce and makes it costly for
businesses to fire employees. For instance, severance pay is three times more expensive in
Mexico than in Chile. The outdated labor laws effectively pushed millions of people, including
more than 60 percent of working youths, into one of the largest informal economies in Latin
America. To address these issues, a new labor law was enacted in 2012 that introduced hourly
pay, probationary periods, women workers’ rights, and tighter policy on severance pay. The bill
also loosened stringent job protections, potentially allowing millions of Mexicans to transition
to the formal workforce. Building on this progress, the country’s longer-term growth will depend
in particular on its ability to improve labor productivity, which has increased on average by only
1.6 percent annually over the past five years.
Enrique Peña Nieto, Mexico’s current president, has prioritized boosting the country’s infrastructure investment in order to generate more economic demand and job creation. The
government aims for investments of $590 billion in nearly 750 infrastructure projects, paid for
by both the public and private sectors, in its National Infrastructure Program 2014–2018. The
energy sector will receive the largest share of investments, with $251 billion to improve gas
transport, install power plants, and build a new natural gas pipeline that will send natural gas
from Texas to Mexico to meet rapidly growing demand in the states of Chihuahua and Durango.
The National Infrastructure Program also will fund transportation and telecommunication
improvements, including building Mexico City’s new $9.2 billion airport (the costliest of all
infrastructure projects), a $750 million fiber optic cable project to reach 70 percent of households, and a $3.3 billion high-speed rail project that would transport passengers between the
capital city and the manufacturing hub of Querétaro.
Despite deficiencies in tertiary education, Poland’s strong universal primary and secondary
education system has produced a workforce with one of the highest literacy rates in the world.
In order to move even further up the value chain, Poland could improve its training and higher
education programs, including building more top-flight universities and investing in more
public-private partnerships in R&D. A longer-term challenge comes from demographic change:
Poland’s working-age population will decrease from 69.6 percent in 2015 to just 63.5 percent in
2025. In 2013, the government decided to increase the national retirement age to 67 for both
men and women, from the previous ages of 65 and 60 respectively. Surplus labor exists,
though, among the youth. While total unemployment has decreased to 10 percent over the past
several years, youth unemployment continues to rise. In 2013, estimates placed unemployment
of those between the ages of 15 and 24 at almost 30 percent. Greater job training programs for
young workers could help to improve their opportunities while simultaneously dealing with the
issue of retiring workers.
Poland is in the middle of the pack of the
2020–Seven in terms of infrastructure quality
and is taking steps to improve. The country’s
road transport and fixed broadband network
are particularly in need of investments.
For instance, Poland is alone among the six
largest EU member states in lacking a highspeed railway system. However, the trends
in Poland’s infrastructure investment are
positive. Since 2007, the EU has invested
almost $42 million to replace and update
Poland’s 5,800 kilometers of roads (including
plans to complete the A2 motorway that
connects Eastern Poland to the PolishGerman border), provide broadband access
to more than 800,000 additional people,
and construct wastewater treatment projects
that benefit more than 250,000 Poles, among
many other projects. Poland will continue to receive monies through 2020 from the European
Regional Development Fund to further improve its infrastructure, including more than $650
million to upgrade roads and urban transport.
Peru’s labor force is relatively urban and well-educated, and its labor productivity has averaged
more than 4 percent growth annually in the past five years. However, Peru’s economy has a very
large informal sector, due in part to its rigid labor laws. President Ollanta Humala has thus far
shied away from liberalizing the country’s labor laws though, likely due to the opposition of
powerful labor unions. Although he introduced a partial reform in December 2014 that cut social
benefits for workers between the ages of 18 and 24, Congress repealed it at the end of January
2015 after thousands of young Peruvians marched through the streets of Lima. So although the
government’s efforts to improve Peru’s educational system may improve the quality of the labor
force over time, burdensome labor regulations are likely to remain in place in the near term.
Unlike the rest of the 2020–Seven, Peru falls below the emerging market average on the World
Economic Forum’s measure of overall infrastructure quality. In a further contrast to the rest of
the 2020–Seven, the Peruvian government does not have an aggressive national plan to invest
in its infrastructure and instead relies on private investments to boost the development of its
transport and energy infrastructure. However, recent infrastructure projects comprised an
impressive 8 percent of the country’s GDP, which includes a $4 billion, 928-kilometer pipeline
to bring natural gas to southern Peru. President Humala recently announced more than 20
projects to improve the country’s highways, upgrade ports, extend metro lines, and construct
airports, hydroelectric plants, and transmission lines. Although Peru is best among the 2020–
Seven in promoting public-private partnerships, the development of a national infrastructure
investment plan would help the economy to better keep pace with increasing demands and
to address its $80 billion infrastructure deficit.
The Philippines has a large labor force that is well-educated and relatively young, with a median
age of only 23. These labor force advantages contribute to the fact that the country’s business
services sector is among the best in the world. However, the economy’s growth potential is at
risk if it does not address high unemployment and underemployment, which has improved little
since the early 2000s. According to the latest UN data, total underemployment and youth
unemployment were at 19.3 percent and 17 percent in 2013 respectively—the second-worst
performance among the 2020–Seven. Unemployment is also high among those with secondary
and tertiary educations, which indicates an imbalance between the skills and opportunities in
the Philippine labor market.
Although Philippine infrastructure performs better than the emerging-market average, economists are concerned that its infrastructure remains deficient and could hinder further growth—
a risk that could be exacerbated by natural disaster (see the Global trends section on page 25).
A recent Japan International Cooperation Agency study found that the Philippines foregoes more
than $20 billion in GDP every year due to poor transportation infrastructure and lost productivity. The country also suffers from consistent power outages in the cities, water shortages,
deteriorating roads, and aging telecommunications infrastructure. President Aquino has vowed
to prioritize infrastructure reform and boost economic growth, announcing that when he leaves
office in 2016, the Philippines will be investing 5 percent of GDP in infrastructure annually,
compared to just 1.8 percent in 2010. The record so far is good: infrastructure spending has
already doubled since 2011, and grew 28 percent a year in the past three years—mostly on
highway and road construction projects.
Policy factors: regulations, governance, and structural reforms
The global economy continues to evolve, and governments of both emerging and developed
markets are tweaking national regulations to better compete with other countries and foster
economic growth. As a result, the future economic success of the 2020–Seven depends on
their ability to keep pace with changing economic realities and international competition.
In particular, continued steps to address transparency and accountability in their systems of
government, including reforms that affect the business environment and attract FDI, will be
needed in the years ahead. Although the 2020–Seven have relatively sound governance and
regulatory environments, each country faces increasing challenges to implement reforms at
a time of uneven global economic growth, a strong U.S. dollar, a slowing Chinese economy,
Figure 9
Poland and Chile have the most business-friendly political and regulatory environments
in the 2020–Seven
Governance and regulations (score of –2.5 to 2.5, with 2.5 = high)
2.5
Chile
Political stability
1.5
Peru
–2.5
–1.5
Philippines
Mexico 0.5
Poland
Malaysia
–0.5
China
0.5
1.5
2.5
–0.5
–1.5
–2.5
Regulatory quality
Sources: World Bank Worldwide Governance Indicators; A.T. Kearney analysis
and a long-term slump in commodity prices—the last of which is a challenge for many, but
an opportunity for some (see figure 9). As a further complication, the economic successes
of the 2020–Seven have elevated more of their populations to middle-class status, leading
to rising public expectations for good governance and continued economic opportunities.
Delivering on these high expectations requires business-friendly regulation that fosters
innovation and investment.
In many cases, structural reforms—reforms to policies that involve the core functioning of
the economy, such as how prices are set, how the financial sector is governed, the rules and
regulations for the labor market, and the design of the social safety net—are needed to avoid or
reduce imbalances and to foster resiliency. Governments in all of the 2020–Seven economies
have undertaken structural reform agendas to varying degrees. Among the 2020–Seven, Poland
and Mexico have made the biggest strides in implementing a reform agenda. Malaysia, Chile,
Peru, and the Philippines have begun reforms, but these are only partially complete. China lags
behind, but if it takes advantage of its current opportunities and fully implements its ambitious
reform agenda, that could soon change.
After the fall of communism in 1989, Poland embraced economic liberalization and implemented
other policies, such as investments in infrastructure and education, which have attracted
business investment and fostered economic growth. Poland’s political stability and businessfriendly regulations position it well for continued growth. However, in Polish politics, personalities and cliques have always mattered greatly, and in that regard the country has yet to fully
recover from having lost several of its foremost leaders in the tragic 2010 Polish Air Force plane
crash near Smolensk, Russia. Nonetheless, Poland’s recent leaders have steered the country
through both economic (regional growth dynamics surrounding the eurozone debt crisis) and
geopolitical (Ukraine-Russia conflict) crises, and they have implemented a series of reforms that
led to a jump for Poland in the World Bank’s Ease of Doing Business rankings from 45th place in
2014 to 32nd in 2015. As always with Poland, the biggest criticism is not its performance to date,
but its unrealized potential, particularly by postponing reforms that would improve labor market
participation rates and general internal market competitiveness. Any such reforms will likely have
to wait until after parliamentary elections in October. Meanwhile, the unexpected victory of
rightist figure Andrzej Duda in May’s presidential elections has introduced greater uncertainty
regarding Poland’s political direction. While the powers of the presidency are quite limited,
Duda introduces a streak of nationalism and confrontation with the EU, as well as a tougher
stance with Moscow regarding events in Ukraine.
Geopolitics aside, the Polish government continues to enact reforms to improve its economic
performance, with recent successes including an increase in labor participation and access to
preschool education, deregulation of professional services, and a reduction in administrative
barriers for businesses. With a well-developed manufacturing sector and stock market, Poland
is well positioned to continue growing, though it must take steps to become more open and
innovative, including reforming its higher education system to meet job market demands,
implementing policies that foster innovation, reducing barriers to entry into markets, and
decreasing the high proportion of state-owned enterprises and national champions.
Chile has some of the most business-friendly regulations among the 2020–Seven and is one of
only three 2020–Seven countries to score in the highest category for democracy in Freedom
House’s 2015 Freedom in the World index. Chile’s liberalizing reforms in the 1980s put the
country on a more sustainable economic growth path than its regional peers, and it continues
to be very open to foreign investment and trade. However, despite continuing incentives for
private investment, President Bachelet’s push for more progressive taxation to fund better
healthcare and an ambitious education program focused on future economic competitiveness
has caused concern among the investor community. And in an effort to encourage higher levels
of female labor force participation, the government has also announced plans to open 4,500
new childcare facilities over the next four years.
However, Bachelet risks a further erosion of her popularity this year as she moves ahead with a
new Chilean constitution “born in democracy” to replace the 1980 constitution adopted under
Augusto Pinochet. The process will open old political wounds in the country and likely prove
disruptive to politics writ large. Although Bachelet’s term lasts until 2017, given her slide in
popularity to below 40 percent, recent disputes with labor, a sustained slump in commodities, and a recent corruption scandal involving her son, she faces growing headwinds to her
policy agenda.
Although Mexico’s economy has many strengths, its opaque political system is not one of them.
With President Peña Nieto’s election in 2012, the Institutional Revolutionary Party (PRI) returned
to rule after a 12-year absence, prior to which it had held all levers of power in Mexico for more
than 70 years. The PRI’s association for some Mexicans with elite-level interests naturally left
Peña Nieto vulnerable to any events suggesting high-level corruption or lack of justice for the
common man—and several such events have occurred. Peña Nieto also has been highly criticized
for his inability to address security issues and improve the accountability of government
officials—most notably around the disappearance and death of 43 college students in 2014 at
the hands of a drug gang and corrupt local officials. If insecurity and corruption in the country
cannot be rolled back, they could undermine Mexico’s growth potential.
On a more positive note, and with a view
toward improving Mexico’s medium-term
economic prospects, the government passed
an ambitious economic reform plan in 2013
that is well on its way to full implementation.
The most critical of these reforms is a partial
opening of the country’s oil and gas sector
to foreign investment, which is expected to
boost investment in the sector, increase oil
production, and foster higher economic
growth. Investors have responded positively,
with Moody’s upgrading Mexico’s sovereign
bond rating from Baa1 (lower-medium
investment grade) to A3 (upper-medium
investment grade) in February 2014, in part
because of this package of structural reforms.
Peña Nieto is confident that this plan and
his other major economic reforms, in his own
words, “will generate more confidence in [Mexico’s] stability and consolidate its position among
the world’s most attractive markets for foreign investments.” In fact, Mexico rose to rank ninth in
the 2015 A.T. Kearney Foreign Direct Investment Confidence Index®. Mexican citizens, however,
have yet to feel the benefits—partly because of the recent fall in oil prices worldwide and partly
because these reforms will take time to bear fruit for the average household. In fact, many
Mexicans believe that these reforms, even in the long run, will benefit companies more than
the average citizen.
Malaysian democracy is defined by the seeming certainty of continued virtual one-party rule
by the United Malays National Organization (UMNO), which has held power in one coalition or
another since Malaysian independence from Britain in 1957. Although this may not make for a
vibrant democracy or spirited political debates, it certainly provides a great deal of political
continuity. This stability is a positive factor in terms of promoting business investment—in fact,
Malaysia has appeared on A.T. Kearney’s Foreign Direct Investment Confidence Index® in three
out of the past four years. In addition, Malaysia has consistently performed well in the World
Bank’s Doing Business index, rising two spots to rank 18 in this year’s index. However, a lack of
political competition can breed complacency among policy makers, as reflected in ongoing
corruption scandals. In order to maintain its economic competitiveness in the 21st-century
global economy, Malaysia’s government will need to continue to improve transparency and
simplify business regulations.
Malaysia has a long record of reform, including introducing a goods and services tax and
strengthening social safety nets. Significant reforms in 2013 removed fuel subsidies and reduced
sugar subsidies. But although Malaysia’s fuel prices increased, they are still fixed rather than
determined by market forces. Allowing fuel prices to move with the market may be necessary
for Malaysia to advance toward its Vision 2020 goal of being a self-sufficient industrialized
economy, but this decision is certain to be politically unpopular. The goals that the government
laid out in the 11th Malaysia Plan due in June 2015 provide an indication of future reform efforts,
including enhancing productivity, improving financial access for knowledge-intensive industries, facilitating exports, and boosting government revenue.
Peru has become more politically transparent and stable in recent decades, but the country
has a legacy of both populist and authoritarian rulers and it continues to face regulatory uncertainty. Notably, President Humala has continued the liberal, open-market policies of previous
administrations, which has helped the Peruvian economy to outperform many of its neighbors.
However, Peruvian presidents tend to lose popular support somewhat dramatically during their
time in office, and Humala’s dismal 22 percent approval rating in early 2015 proves that he is no
exception. It led to a cabinet reshuffle, including appointing his fifth prime minister since he
took office in 2011. Humala has effectively become a lame duck ahead of 2016 elections, making
additional improvements in Peru’s regulatory environment unlikely in the near term. Humala’s
unpopularity stems from a number of areas, including the failure to attain the economic growth
targets set out by his own finance ministry in 2014, growing violence surrounding protests by
indigenous people against extractive industry activities, and continued income inequality. As a
result, his major achievements of consistent economic growth and dramatic expansion of the
middle class have been increasingly ignored.
The future economic success of the 2020–
Seven depends on their ability to keep
pace with changing economic realities
and international competition.
In recent years, though, Peru has implemented a variety of much-needed structural reforms that
have successfully diversified its tax revenues, strengthened its private pension system, and
reduced barriers to investment to enhance competitiveness and ensure inclusive growth. Despite
this progress and Peru’s status as one of the liberalized economies of South America, more
reforms are needed. In particular, the government needs to improve tax collection and reduce
the size of the informal sector, which employs two-thirds of the working population. In addition,
productivity could receive a boost through reforms that would make the labor market more
flexible, improving education and worker training, and improving infrastructure.
The presidency of Benigno Aquino has been a golden moment for democracy and reform in
the Philippines. At 95th on the World Bank’s Ease of Doing Business index, the Philippines is the
lowest-ranked country among the 2020–Seven—although it is worth noting that the Philippines
jumped an impressive 30 places on the index in 2014 and a further 13 places in 2015. But with no
political heir apparent when Aquino’s term ends in 2016, this success has done little to reassure
longtime observers that the country will not backslide to more authoritarian-like rule and high
levels of corruption. There is a Filipino saying, “Genuine patriotism is in the sweat of action”—and
much more sweat of action on governance reform will be required. The Philippines must also work
to overcome its reputation as an unwelcoming environment for foreign companies and investment, given popular anti-European, anti-American, anti-Chinese, and anti-Japanese sentiments—
each the products of uniquely bad historical experience with those countries. The Philippines is
also home to the Abu Sayyaf group based in Mindanao, the most active and worri-some outpost
of violent extremism in Southeast Asia. Peace talks between the group and the government
of the Philippines broke down in early 2015 following a botched counter-terrorism operation,
frustrating at least for the moment a key opportunity to broker a political solution to the conflict.
Since taking office in 2010, Aquino’s government has implemented a variety of structural,
administrative, institutional, and governance reforms that have begun to unlock the country’s
growth potential. In addition, the Philippines’ financial sector is well regulated, and the Aquino
administration has improved tax administration and grown tax revenue by 12 percent. All three
major credit ratings agencies upgraded the Philippines to investment grade in 2013 as a result
of these sound economic policies and high economic growth. As the Philippine economy
continues to develop, the government will need to build on its institutions to broaden access
to credit and expand its tax base. And by reducing limits on foreign ownership and moving to
protect property rights, the Philippine government could help move the country forward to
the next stage of economic development.
China is notably the only country among the 2020–Seven that does not have a democratic
system of government, though that has not proved an impediment to its historically unprecedented rate of economic development over the past several decades. However, a test clearly
looms for China as it prepares to transition from investment- to consumption-led growth (as the
GBPC covered in depth in a previous Strategic Issue Assessment, Dragon at the Precipice). With
its vast economy and legacy of state planning, China is the 2020–Seven economy with the most
daunting reform challenges ahead. This is captured in the government’s November 2013 Third
Plenum reform blueprint, which outlined a variety of far-reaching social and economic reforms
to put the economy on a more sustainable growth trajectory. Among those reforms, plans to
implement a more flexible exchange rate could set the groundwork for China to use monetary
policy more effectively. The Chinese government also has begun a second wave of privatizations to improve efficiency in the market.
Since Xi Jinping assumed power in 2012, “Papa Xi” has positioned himself to become the
most influential Chinese leader not only since Deng Xiaoping, but perhaps since Mao Tse Tung.
Instrumental in Xi’s rise has been his willingness to stir patriotic nationalism, his embrace of
a cult of personality, and his very public commitment to an anti-corruption campaign the
Communist party claims will have “no ending.” The country currently ranks 100th in the 2014
Transparency International Corruption Perceptions Index, the second-lowest among the 2020–
Seven, and the party’s campaign to stamp out corruption includes trials of high-level officials
and the impaneling of disciplinary committees across the country (see figure 10). This is part
Figure 10
China performs poorly among the 2020–Seven on corruption
Corruption Perceptions Index [Scale of 0 (highly corrupt) to 100 (very clean)]
80
73
Improvement in score
61
60
Deterioration in score
52
40
38
38
36
35
Philippines
Peru
China
Mexico
20
0
Chile
Poland
Malaysia
Note: The Corruption Perceptions Index 2014 measures the perceived level of public sector corruption for 174 countries.
Sources: Transparency International Corruption Perceptions Index; A.T. Kearney analysis
of a larger attempt to make government officials more accountable to citizens, as are efforts to
improve compliance with environmental and safety standards. However, rooting out corruption
and improving local enforcement of regulations will take time and persistence. Another key
challenge remains the further privatization of state-owned industry and the opening of the
service sector to fair and international competition, both of which have proven stubbornly
resistant to such changes. Still, China’s political leadership has the advantage of being able to
plan for the long term, allowing it to take steps that may be painful in the short term but can lead
to long-term efficiency and growth.
Global trends
In addition to the largely internal dynamics of the eight factors of the 2020–Seven analysis
discussed above, three important global trends are likely to affect the 2020–Seven in the coming
years (see figure 11). The first is the continued growth in the economic power of East Asia. The
second is climate change, including rising sea levels and increased frequency of severe weather
events. And the third is the global resource slump cycle. Among the 2020–Seven, Poland will be
least affected by these trends in the next five years. All others stand to gain from the rise of East
Asia either directly (given geography) or through trade (particularly a successful, eventual Free
Trade Area of the Pacific). With regard to climate change, China, the Philippines, and Malaysia
will be most negatively affected, given their coastlines, geography, and existing resource and
environmental challenges. And as the world’s largest overall consumer of raw materials, China is
likeliest to gain from the commodity slump cycle, while Mexico, Chile, and Peru in particular will
find it a drag on their growth.
Asian economic power. After 200 years of economic ascendency of the West, the economic
center of gravity is shifting east again—back to Asia, and particularly to its growing cities and
urban middle class (see figure 12 on page 26). The rise of the urbanized Asian consumer class is
increasingly central to the global economy, driving production, investment, and consumption
patterns. Brookings Institution scholars have predicted that by 2020 the Asia Pacific region will
contain the world’s largest middle class, accounting for 54 percent of the world’s middle-class
population and as much as 59 percent of total global consumer spending.
Figure 11
Global trends will affect the economic performance of the 2020–Seven markets
Key global trends affecting the 2020–Seven markets
Asian economic power
Chile
China
Malaysia
Mexico
Peru
Philippines
Poland
+
++
++
+
+
++
?
Climate change
–
–
––
–
–
––
–
Resource slump cycle
––
+
–
––
––
–
+
Source: A.T. Kearney analysis
Figure 12
Asian economic power is growing, shifting the world’s economic center of gravity to the East
Global economic center of gravity
1980
2001
2016f 2025f
38% of global GDP
51% of global population
Notes: GDP is measured at purchasing power parity. GDP and population figures are 2015 forecasts.
Sources: Global Policy (Vol. 2, Issue 1), IMF World Economic Outlook, UN Population Division; A.T. Kearney analysis
This economic shift will also have important geopolitical consequences, including the
potential for the reemergence of great power conflict between a rising China and the established global power, the United States. Since the end of the Second World War, the U.S. Navy
and other expeditionary elements of its military have acted as the guarantor of the global
commons, including protecting sea lanes critical to trade in the Asia Pacific and Indian Ocean
regions. Over the past decade, China has translated its economic growth into increasing
military development, and its defense budget is now the second-largest in the world—greater
than the combined budgets of the United Kingdom, France, and Germany (though still only
one-third of U.S. military spending). The future of the region, and with it the global economy,
rests on whether the United States and China can realize what Beijing has called “a new model
of major country relations” that would avoid the pitfalls of historical great power competition.
As the largest economy in East Asia, China stands to gain the most from this global trend—
both economically and politically. Malaysia and the Philippines will also benefit as the world’s
economic center of gravity moves closer to them. However, the risk of conflict with China may
rise as the stakes increase, particularly surrounding territorial disputes in the South China Sea.
But it is not only Asian economies that will benefit from the growing power of Asia in the global
economy. Notably, the Latin American economies that are members of the Pacific Alliance—
a group of liberalized economies whose goal is to deepen cooperation among themselves and
forge closer relations with the Asia Pacific region—will also benefit from increased trade and
foreign investment opportunities. And all three of the 2020–Seven in Latin America—Chile,
Peru, and Mexico—are members of the Pacific Alliance. (The fourth member is Colombia.) The
only 2020–Seven economy that does not stand to benefit as directly from the economic rise of
Asia is Poland. However, Poland’s role in Germany’s manufacturing supply chain means that its
trade with Asian economies could also receive an indirect boost, as could the volume of freight
on the trans-Asian railway that opened in 2013 connecting central Poland to China.
Climate change. All of the 2020–Seven are coastal nations (with the Philippines and Malaysia,
of course, as archipelagic nations to boot), and with the exception of Poland and Mexico, the
population of each of these countries is clustered in urban centers along their coastlines. These
nations are therefore particularly vulnerable to the effects of climate change.
Climate change is affecting the frequency and severity of disasters (see figure 13). The World
Bank estimates that extreme weather events have cost the global economy $150 billion each
year in the past decade. For instance, the two archipelago 2020–Seven nations have been
directly hit by extreme weather events in recent years. In 2013 Typhoon Haiyan—the most
powerful recorded storm ever to make landfall—killed 6,300 in the Philippines and caused
$13 billion in damage—equivalent to 5 percent of Philippine GDP that year. And heavy rainfall
in Malaysia in December 2014 caused the country’s worst flooding in history, forcing 200,000
people to evacuate and causing more than $300 million in damages.
Figure 13
Many of the 2020–Seven markets are vulnerable to increasing extreme weather events
Global extreme weather events (number per year)
250
200
150
3,742 floods
100
2,889 storms
50
499 droughts
450 extreme temperatures
0
1980
1985
1990
1995
2000
2005
2010
2015
Sources: U.S. National Oceanic and Atmospheric Administration, EM-DAT: The OFDA/CRED International Disaster Database; A.T. Kearney analysis
Climate change has also had slower-moving, although still detrimental effects on global food
production and the spread of tropical diseases such as malaria to new geographies. A global
mean average temperature rise of 2.5°C may lead to global aggregated economic losses of
0.2–2.0 percent of income, although this aggregation hides large differences in impact between
and within countries. For instance, people living in megacities that are vulnerable to extreme
weather events and rising sea levels will be particularly hard-hit, such as the 720 million Chinese
(60 percent of total population) who live in 12 coastal provinces where the country’s wealth is
overwhelmingly concentrated.
Resource slump cycle. The resource super-cycle of the early 2000s, in which the global prices
for energy, metals, and minerals hit 50-year highs and agriculture prices struck a 30-year high,
is now over. This is due to both increased supply as new production comes online—notably
including unconventional oil production in the United States—and decreased demand as China’s
economic growth slows, alongside continued lessened demand from Europe and a number of
emerging markets. Commodities cycles typically last about 13 to15 years because it takes time
Figure 14
The new resource slump cycle will persist through 2020 and beyond
Commodity price indices (index values, 2005=100)
Super-cycle
Slump cycle
240
180
120
60
All commodities
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2011
2012
2013
Fuels
Metals
2014 2015f 2016f 2017f 2018f 2019f 2020f
for supply infrastructure to realign with demand dynamics, so the world is likely at the
beginning of a long period of lower prices (see figure 14).
By mid-March 2015, oil prices had dipped to less than $44 per barrel, the lowest level since the
depths of the global economic crisis in March 2009 (although they have rebounded somewhat,
to around $60 in late June). In early March 2015, ExxonMobil CEO Rex Tillerson told analysts,
“My view is people need to kind of settle in for a while. There’s a lot of supply out there. And I
don’t see a particularly healthy world economy.” The geopolitical volatility of 2014 simply did not
translate into higher prices, as supply was buoyed by North America as the world’s new swing
producer, and Saudi Arabia proved unwilling to cut production in the interest of maintaining
market share and decreasing incentives for new unconventional projects worldwide.
This fall in global oil and other commodity prices should provide a boost to global growth
through the increased spending power of consumers, although this benefit has been slow to
materialize. In addition, lower commodity input prices for a variety of manufacturing and
agricultural producers will also boost growth in those industries. While such trends are positive
for commodity importers—including China and Poland—they have negative fiscal and growth
implications for key commodity exporters—including Peru, Chile, Mexico, the Philippines, and
Malaysia. Implications for Malaysia are actually mixed, because although it is one of East Asia’s
largest oil producers, it remains a net importer. Implications are also mixed for Poland, which
has seen a number of international oil companies pull back from development of its newfound
shale reserves. Mexico hopes that foreign investors take a longer view, as it opens its energy
sector to foreign investment this year. The biggest winner is likely China, whose status as the
world’s second-largest oil consumer and importer is less problematic in this environment.
Section II: Subject-Matter Expert Interviews
To cover the broad geography at hand, the GBPC asked three leading regional
economists to comment on the outlook for the 2020–Seven.
On China, Malaysia, and the Philippines
Dr. Michael G. Plummer, director, SAIS Europe; Eni Professor of International Economics, Johns
Hopkins School of Advanced International Studies (SAIS)
GBPC: How will the 2020–Seven economies perform relative to other countries in their
respective regions over the coming five years?
Dr. Plummer: I’m relatively sanguine for Malaysia and the Philippines and relatively pessimistic
for China because of the difficulties the economy is having in trying to rebalance itself, which is
an important government priority but no mean feat to implement. And the Chinese government
thinks the economy is something it can easily control, but that is becoming increasingly difficult
as it becomes more sophisticated.
GBPC: What are the major opportunities and drivers of growth in the regions? And what are the
obstacles to growth?
Dr. Plummer: Chinese growth is subject to considerable uncertainties. We’re never going to see
the double-digit growth we saw earlier because of the usual difficulties associated with higher
levels of development, internal bottlenecks, and the increasing realization of some of the
environmental costs to growth that are only now being internalized. While there will naturally
be deviations along the trend, the trend will be falling over time.
In addition, there continue to be problems in the Chinese financial sector, and particularly with
respect to growing nonperforming loans and uncertainties regarding the rise in off-balance
sheet investments. There are also some debt problems, especially at the local levels. To be fair,
Western observers have been warning of a potential financial crisis for a decade, and it has not
happened. But I do think that there are problems in the Chinese economy that are going to have
a bearing on growth in coming years, and the risks associated with growth will be nonlinear
(and, hence, poorly captured in the usual forecasting models). And just like any other system
that is capitalist in nature, China is going to have growth cycles.
Recently there has been significant monetary stimuli to the Chinese economy and other
growth-oriented measures, but the next five years will see slower growth, more consolidation,
and a certain probability that there will be a significant downturn in the country. I do not think
that is a particularly high probability, but the value at risk is higher than it has been in the past.
How well China will be able to manage a soft landing is also unclear.
I’m fairly sanguine for Malaysia. In spite of the slowdown in China, external demand is going to be
positive for the Malaysian economy. Being a very open economy, it will continue to experience
strong external demand, particularly because the United States is going to continue to grow.
And the Fed is going to start raising interest rates (something more likely given strong jobs
growth and the recent drop in unemployment to the “full employment” range), an expectation
shared by the market as evidenced by the skyrocketing dollar relative to the euro. This move,
too, is fraught with uncertainty, given the fact that it has had zero interest rates since 2009. In
any event, with higher interest rates and solid growth in the U.S. economy, the dollar is going to
continue to strengthen, resulting in more competitive Malaysian exports on the international
market. It might also attract more externally oriented FDI, which has always been critical to
certain manufacturing sectors in Malaysia. The electronics sector in particular should take off.
Still, commodity exports for Malaysia and the Philippines will not be a bright spot, at least in the
short run. The Philippines, of course, is a big question, because its very strong growth in recent
years has been due to strong commodity prices to no small degree. These have now come
down, but in my view have probably stabilized. This stated, we are not going to see the growth
in commodity prices that happened in 2007 or 2008, for example. But there are some internal
dynamics in the Philippines that should be relatively positive. It is an economy that has picked
up and may well have finally hit a good medium-term stride that will have some traction. The
Aquino government has done a good job of addressing some key institutional and governance
problems that should facilitate this growth.
“Chinese growth is subject to considerable
uncertainties. We’re never going to see the
double-digit growth we saw earlier.”
—Dr. Michael G. Plummer
GBPC: What role might broader global macroeconomic trends play in the outlook for these
countries? For instance, what about low energy prices, a strong dollar, free trade agreements,
or emerging technologies?
Dr. Plummer: The TPP [Trans-Pacific Partnership] I can speak to the most because that has been
part of my research over the past few years—together with my colleagues, modeling what its
effects would be. We have estimated the effects on Malaysia to be very positive, particularly
from the TPP. The Chinese-led RCEP [Regional Comprehensive Economic Partnership] I think is
still trying to find its legs. RCEP realistically will not receive the necessary political push to
proceed in earnest until there is a successful TPP deal, which will serve as a credible competitor.
Given the uncertainties in U.S. policy making and the comprehensive nature of the agreement,
nothing is a given and nothing is certain, in the United States and in some other countries. Still,
things are looking better for an accord than they have in the past.
I do believe that an accord could be completed this year, with government or parliamentary
approval in member states in 2016 and implementation in 2017. This scenario looks better than it
ever has, something that is very important for Malaysia, not just because the TPP will give it free
access to the largest country in the world, the United States—as well as other markets—but also
reforms that should help long-term growth and competitiveness.
GBPC: Why do you think Malaysia will come out a winner on the TPP? And how will it affect
China and the Philippines?
Dr. Plummer: Malaysia already has bilateral agreements with a number of the partners in the
TPP via ASEAN (including China), but something that will really benefit the country is the culmination of rules of origin inherent in the TPP. Rules of origin require a certain percentage of any
good eligible for tariff preferences to be produced in the region (to prevent, for example, a third
country from simply exporting through the lowest-tariff country in the agreement). Rules of
origin in bilateral agreements can be costly, particularly since much of Malaysia’s manufacturing
trade takes place in the context of regional production networks in Asia. Cumulative rules of
origin in the TPP will be more efficient in that they will facilitate production networks in the region,
which will not only stimulate trade, but also create a big incentive for foreign direct investment
to come to Malaysia, which continues to be less than in its heyday before the Asian financial
crisis. And I think that it could really pick up quite a bit once the TPP is implemented because
Malaysia has a lot of positive features, not just geographic, but in terms of its workforce, its open
market, and in other areas that are of great significance to these regional production networks.
The Philippines is not a party to the TPP and will not be affected much by it. Still, once the TPP
goes through, I am certain that the Philippines will line up for the first expansion of the TPP. This
will be very positive for the Philippines because, politically, it would be very difficult for the
Philippines to have a bilateral free trade area with the United States, despite the fact it would
likely be among the greatest beneficiaries of free trade with the United States.
The one country that is going to be negatively affected by the TPP will be China, but again
over a five-year period, I think that TPP and the Free Trade Area of the Asia-Pacific (FTAAP) will
emerge as policy priorities for China. We estimate that it would face trade diversion of about
$34 billion outside of the TPP, which is about two-tenths of 1 percent of Chinese GDP in 2025.
So it is not big, but China would bear the brunt of the trade diversion of TPP. Its competitors in
the TPP markets would have a leg up on China since they would have duty-free treatment,
nontariff barriers would come down, and there would be other benefits.
There is an increasing, active debate in China regarding whether or not the country should
join the TPP. It used to be that people were very skeptical of it in China. The reticence to join is
receding to some degree. At the APEC Summit in Beijing last year, the Chinese reiterated the
APEC priority of the FTAAP and advocated that a major study on it be launched. Now, the FTAAP
would include all APEC countries and would start negotiations in 2020, as decided in 2010 in
Yokohama, Japan. In fact, the “Yokohama Vision” not only called for negotiations toward an
FTAAP be launched in 2020, but also for there to be two paths leading to it: one would be the
TPP, and another would be an Asian path that has now revealed itself to be the RCEP. If the TPP
is successful, the big decision facing China would be whether to join the TPP in a subsequent
enlargement, or wait a few years to begin the FTAAP. Either way, there will be a very strong
economic incentive and, to some degree, a political incentive for the country to participate in
those processes.
The studies that my colleagues Peter Petri, Fan Zhai, and I have done on the economics of these
integration scenarios underscore that, under both the TPP and the FTAAP, the biggest global
gains happen when the United States and China have free access to each other’s markets. We
also contributed to a recent Peterson Institute for International Economics study on a China-U.S.
free trade area that underscored this point. Merely a bilateral FTA between the two largest economies in the world would be worth an aggregate value of $541 billion for these two economies,
significantly more than either would receive in a TPP or RCEP that would exclude each other.
GBPC: What are the key upcoming events or issues to watch in the next six to 12 months in these
countries that may influence economic growth?
Dr. Plummer: A question looming is what happens with the ASEAN Economic Community
(AEC), which is supposed to be finished by this year, but is unlikely to be. But there is a process
in motion to try to finish it, and that is what is important from a practical point of view. If at the
end of this year it is not complete, what happens next? Will the deepening of integration
continue? That is what is really critical: to not lose the momentum from the AEC liberalization
measures. For Malaysia and the Philippines, deepening ASEAN integration is essential, given
their respective stakes in regional development, regional production networks, and integration
into the global marketplace. I think that at the end of this year there may be some messages
about how this process is going to unfold.
There is one important fear that I have shaped by the European experience. Right now, the
United States is a major growth pole in the global economy. What we are seeing is a process
whereby the U.S. economy, which is relatively closed in that it depends more on itself than on
external demand, is growing fairly rapidly, leading to increasing imports from other regions. So,
the often-unarticulated hope of European recovery is that this external demand will bring
Europe out of its doldrums. Indeed, Germany in the past has almost always rebounded through
external demand. Now the euro has lost almost one-third of its value since last summer, creating
a situation in which external demand could be the key vehicle of growth by stimulating the
European export machine, which is already beginning to hum. This might also happen in Asia;
prior to the Great Recession, many East Asian economies were growing to no small degree
because of net exports.
The problem of course in this scenario—which seems increasingly likely—is that it creates
imbalances. The United States could go back to the bad old days and habits. Right now it has
got a relatively stable current account deficit of less than 3 percent of GDP, and that is usually
thought to be a sustainable figure, but as the economy moves toward double that percentage,
which was the case before the 2008 crack, its sustainability will become increasingly tenuous.
The last thing that the world needs is a repeat of the Great Recession.
Europe is peculiar. Before the crisis it had balanced trade vis-à-vis its trading partners. But within
Europe itself, it had huge imbalances, where Germany had large surpluses (often bigger than
even the Chinese surpluses), and there were huge deficits in Ireland, Portugal, Spain, and
Greece. If one fast-forwards to today and reads IMF forecasts, it looks like trade surpluses in
these countries will be positive in all countries, thereby creating a big trade surplus for the
region. If East Asia also fails to rebalance and instead continues to grow via net exports, there
could be a premature end to the current rebound. So my caveat to that optimistic scenario is
that we could see these imbalances emerge again, and that could be a problem.
On Mexico, Chile, and Peru
Dr. Sebastian Edwards, Henry Ford II Professor of International Economics, University of
California, Los Angeles; codirector, Africa Project, National Bureau of Economic Research
GBPC: How will the 2020–Seven economies perform relative to other countries in their
respective regions over the coming five years?
Dr. Edwards: For the Latin American countries on your list, the most important question has to
do with [U.S. Federal Reserve Chairperson] Janet Yellen. We know for sure that the Fed will start
hiking rates this year, and when it starts, it’s going to be major. The key question is what is going
to happen then, and probably it’s going to be bad for everyone in these countries. Not devastating, but very bad.
The second question is what will be the local contagion within the region? When Venezuela
finally implodes, what will be the consequences in the rest of the region? The answer to that is,
besides Colombia because it is a border country, probably very little will happen. The next
question is that Brazil is pretty vulnerable, and quite a few people think it is going to run into
severe difficulties. If that happens, what will be the contagion effect? It would be much more
severe than in the case of Venezuela.
GBPC: What are the major opportunities and drivers of growth in the regions? And what are the
Dr. Edwards: The first important question is, how much of the very high levels of international
reserves are the central banks of these countries going to be willing to use up in order to
accommodate or to buffer any external shocks that are major? Every one of these countries has
a significant stock of international reserves. In theory that should help them. But it is a little bit
like a family that has a lot of assets, but the assets go back in the family for a few generations,
and they may be unwilling to sell them if there is a crisis. In theory they could, but they do not.
The second question is an internal issue. How will the market react to the fact that they used
their reserves? In principle, countries accumulate reserves to use them during bad times. Let’s
say that Mexico has $300 billion and uses up $100 billion. Any optimal inventory model will
show that if a country is hit by some awful shock, that is the correct course of action. But then
the market may interpret it as a sign that the country is using the reserves as some kind of
weakness, or that it is a sign that the end is coming, and they may start speculating against the
currency. That is a big question, to which I do not know the answer. No one knows the answer.
“Every one of these countries [Mexico,
Chile, and Peru] has a significant stock
of international reserves.”
—Dr. Sebastian Edwards
GBPC: What role might broader global macroeconomic trends play in the outlook for these
countries? For instance, what about low energy prices, a strong dollar, free trade agreements,
or emerging technologies?
Dr. Edwards: The questions that I think are interesting when one tries to look forward at Latin
America, are to ask: Are there regional-based troubles coming up? Do we foresee homegrown
problems? We do, of course, in Venezuela and maybe Brazil, but not in too many other countries.
A second question is: If there is trouble and it is not coming from inside these countries, how
vulnerable are they to problems stemming from abroad? What problems do we have in mind?
One issue is whether commodity prices will continue to go down or not recover. And I think that
will continue to be the case. I think that the Chinese economy will continue to slow down. I think
that the dollar will continue to be strong. I think that, related to both of those, commodity prices
will continue to go down. Most countries in Latin America, including the three you have asked
about, are well prepared to handle that because they do have a lot of reserves and they are
committed to letting the currency change and adjust. They are not going to resist those changes.
The Trans-Pacific Partnership is a Washington insider term, but no one knows what it is. It is one
of those things that people in U.S. policy circles think is important, but one can go to the south
and visit businesspeople in these countries, and two-thirds of them do not know what it is. They
are doing their best to sell to China, independently of what the bureaucrats and the diplomats
do. So I think that if it happens, it is good; if it doesn’t happen, it is not bad. No one has made any
investment or decision on the hope that it will happen.
Another issue to watch is the move of mid-level technology companies from China to Mexico.
This is technology that is not so sophisticated as to require robots, but neither is it so simple that
it can be done anywhere. Technology is a big question. The Mexican case is very interesting and
is something to look at.
GBPC: What are the key upcoming events and issues to watch in the next six to 12 months in
these countries that may influence economic growth?
Dr. Edwards: In Mexico, there are two issues that are very important. One is whether the energy
reform will actually move along at the pace they are looking at. And that has to do with three
things. One is the price of oil. If they do not get enough companies to bid for fields, that will be a
problem. Deepwater fields at current oil prices are not profitable, so they are not going to get
bids and will have to postpone that process. Energy reform is crucial, including construction of
pipelines to get natural gas so that the technology and manufacturing actually get built in
Mexico. Furthermore, the whole issue of importing gasoline is quite important. Another related
issue with Mexico is where they will get petroleum engineers. Mexico does not have good
energy engineers, and has tried to bring in engineers from Venezuela, those that have been
fired by PDVSA [Petróleos de Venezuela, the Venezuelan national oil company]. The second
aspect in Mexico that is very important is narcotics, drug trafficking, and security. Because of
the corruption scandals, those issues have been discussed and there are plans to deal with
these challenges.
In Chile, the main problem is whether investment will decline after a year of bad performance.
And that has to do with politics. A second issue is what will happen to copper and mining in
general. There are all sorts of environmental issues and rulings by different courts that are either
not being enforced or are controversial. Energy in Chile, of course, is much more expensive
than in the rest of the region. But there is going to be energy reform, and we will have to see
what the fruits of that are. Politically, there is going to be a constitutional reform and a new
constitution. This may be politically problematic, but we have to wait and see.
In Peru, I think that investment in mining is a problem. The reaction of the indigenous population
is an issue for mining projects, along with corruption, of course.
On Poland
Dr. Anders Åslund, resident senior fellow, Dinu Patriciu Eurasia Center, Atlantic Council;
adjunct professor, Center for Eurasian, Russian and East European Studies (CERES),
Georgetown University
GBPC: How will Poland perform relative to other countries in its region over the coming five
years?
Dr. Åslund: Poland is generally on a growth path of about 3 percent. It will grow much faster
than other Western European or EU countries and slightly faster than other Central European
countries, partly because it has better potential for growth and partly because it is lagging
behind. It has quite a bit of catch-up growth to do.
GBPC: What are the major opportunities and drivers of growth in Poland? And what are the
Dr. Åslund: Poland is strong on entrepreneurship, decent on business environment, but not
great on higher education, and poor on research and development. And, despite the fact that
a lot has been done about infrastructure in recent years, Poland has had very poor road and
rail infrastructure in comparison with other Central European countries. Distances are quite
substantial in Poland. There is a surprising amount of regional unemployment in the northeast,
the southeast, and the northwest.
“A special growth potential in Poland is the
Warsaw stock exchange, which is by far
the best in any post-communist country
with about 800 listed companies.”
—Dr. Anders Åslund
What Poland has had for a long time is much more entrepreneurship than other countries in the
region. Poland has therefore undergone more creative destruction. There are new enterprises
that have come and taken over. There is a shortage of big enterprises still, but there are plenty of
small and medium-size enterprises. There is a concern—this is connected with enterprise
structure—that the big enterprises that remain tend to be state-owned. And it is normally big
companies that do the big things in technology, while the small enterprises are too small to
develop much themselves. The big companies that could be the source of the spin-offs do not
exist in Poland. High-tech innovation is where Poland is weakest.
What I find a particular weakness is that Poland has an R&D expenditure that is below 1 percent
of GDP. While generally post-communist countries have low R&D spending, Poland is even
lower than most. And the quality of higher education is not good enough. So higher education
reform is something that really should be done to improve the situation. Poland had a good
academic culture that survived from the communist era, but nothing has been done in order to
improve it since.
A special growth potential in Poland is the Warsaw stock exchange, which is by far the best in
any post-communist country with about 800 listed companies, while Moscow has only 500
listed companies.
GBPC: What role might broader global macroeconomic trends play in the outlook for Poland?
For instance, what about low energy prices, a strong dollar, free trade agreements, or emerging
technologies?
Dr. Åslund: Poland is not too strongly influenced by these trends. While it is a net importer of oil
and gas, it produces a lot of energy itself. The worrisome trend is that the current Polish
government is very much in favor of national champions. The big state banks, state energy
companies, and state transportation companies have made a comeback and tend to expand at
the expense of the private sector rather than pushing for further privatization. The typical case
is that the prime minister had to give in to the state coal mine workers when they demanded
higher salaries and opposed layoffs. This was completely against increased economic efficiency
in the coal mines.
If there is any concern right now, it is that Poland has deflation, which came as quite a surprise.
Nevertheless, I would not think that is a big problem.
GBPC: What are the key upcoming events and issues to watch in the next six to 12 months that
may influence Poland’s economic growth?
Dr. Åslund: The quantitative easing that the ECB [European Central Bank] is pursuing will
be beneficial for Poland in two regards: one is that there will simply be more demand, more
liquidity, and Poland has a good opportunity to utilize that. The other is that the exchange rate
is likely to fall even more than the euro. So Poland would be quite competitive price-wise. Since
this is combined with deflation, Poland has no worry about inflation. So this is a pretty ideal
situation in the short term for high growth, which could be easily 3.5 percent instead of the
standard 3 percent.
GBPC: What would a Greek exit from the eurozone mean for Poland? And what about the
continued crisis in Ukraine?
Dr. Åslund: If Greece leaves now, it would probably be good for the eurozone as such. The
reasons are it would improve the discipline and the cohesion of the rest. If Greece leaves, it
could be a kick for the others to start doing more reforms, which have been sadly missing in the
last couple of years. It would both give more cohesion, and it would improve the politics within
the European Union. Poland is not all too concerned about it. In any case it has not contributed
to the financing of the Greek bailout. Poland is intent on adopting the euro, but not anytime
soon. There really is no time line for when Poland should adopt the euro. It turns out this floating
exchange rate and targeting inflation works quite well.
Strangely, I do not see that Ukraine influences Poland particularly. When Ukraine does take off,
I see a lot of Polish foreign direct investment in manufacturing in Western Ukraine. There is quite
a bit already and there will be more, but it will take quite a bit of time to take off under these
circumstances. Not in the short term, but in five years, this should be a substantial positive if
peace returns to Ukraine.
Poland is very much part of the German supply chain. To a considerable extent, where Germany
goes, Poland goes as well. I take for granted that German companies dominate FDI in Poland,
and for German companies it is vital to have cheaper production in Poland in order to be
profitable. This is a highly positive relationship. These supply chains should be stretched further
to the east to Ukraine [through Poland].
Section III: Conclusion and Business Implications
Despite the global economy being on more stable footing now, the next five years are likely to
be a period of continued global macroeconomic volatility. As a result, there are no sure bets
that businesses can make. However, the 2020–Seven analysis shows that some markets are
more likely to provide growth opportunities than others—and that a comprehensive analysis of
economic indicators, business facilitators, and policy and regulatory factors helps to identify
those growth markets. There are several key principles that business leaders should take into
consideration to manage risk and identify opportunity, whether seeking market entry, exit, or
strategy adjustment.
Global lens. It is important to think globally and hedge bets in key regions around the globe
by looking across a range of factors, including governance and upcoming political transitions.
Using global benchmarks—rather than more limited regional ones—to assess opportunities and
risks in a given country provides a clearer picture of its prospects. This Strategic Issue Assessment
presents a level of detail essential to understand underlying dynamics in the seven countries
that the GBPC identified as best bets for emerging-market growth out to 2020. Absent this level
of analysis, multinational companies risk pursuing expansion or growth in particular regions
without sufficient strategic differentiation between countries. Country governments, meanwhile,
risk becoming too confident and comfortable in comparing themselves to immediate neighbors,
some of which may be underperforming globally.
The 2020–Seven markets are a diverse
group, with diverse economic strengths
and a variety of challenges that they
must overcome in order to achieve their
growth potential.
Transpacific economic strength. While global economic power is shifting to Asia, the
geography of the new global economy is better understood as transpacific, with opportunities
on both sides of the ocean. Over the next several years, the area will remain a patchwork of free
trade areas and flows, but by late this decade, it will increasingly be one coherent area. As the
economies of the Americas and Asia become more interconnected through value chains and
investment flows (in addition to physical trade volumes), and as the massive economies of the
United States and China become further intertwined, the global potential will be enormous.
Europe, the Middle East, and Africa need not be losers in this new global equation, but in order
to benefit they will need to reorient their strategic approaches to better connect to Asian
markets. Absent such linking strategies, they risk becoming ancillary to the heart of the new
global transpacific economy.
Investment incentives. It is increasingly a “buyer’s market” in which a company that brings
a value proposition—such as helping a high-growth country transition to an innovation-led
economy—can push foreign governments to improve their business climate and incentivize
investment.
In addition to the three broad business implications above, there are specific challenges and
opportunities in each of the 2020–Seven markets. It is important to keep in mind that the
2020–Seven markets are a diverse group, with diverse economic strengths and a variety of
challenges that they must overcome in order to achieve their growth potential. Below are some
of the key opportunities and challenges in each of the 2020–Seven markets in the near to
medium term.
China must once again write world history as it faces a daunting reform agenda to ensure future
growth and prosperity. It has emerged as a new engine of global wealth creation, and represents a massive consumer market—one essential to its own future economic well-being, as well
as that of others around the world.
• Seize the opportunity… There is enormous growth potential in China’s manufacturing
industries, particularly to serve its growing consumer market. High-growth sectors include
automotive, computer software, and higher-quality garments and textiles.
• Trending… Continued pressure by the central government to open up state-owned enterprises to private and foreign investment is creating new opportunities, particularly in the
service sector. However, the regulatory environment remains challenging and volatile for
foreign businesses, especially in the high-technology sector.
• Watch out for… Increased risk in China’s banking sector, with local government debt having
grown to unserviceable levels on top of unknown, massive shadow banking risks tied to real
estate speculation. The People’s Bank of China is considering options to restructure debt and
allow trading of local-debt bonds, but that carries new risks.
Malaysia is enviably positioned in East Asian value chains, and increasingly stands to benefit
from greater transpacific trade flows with its highly skilled workforce.
• Seize the opportunity… Malaysia’s strong domestic consumer market is one of the fastestgrowing and most open in East Asia.
• Trending… Malaysia’s economy is diversifying quickly; it is keeping pace with high-technology
manufacturing, and it is a growing destination for advanced medicine and tourism.
• Watch out for… High levels of public and foreign-denominated debt, low international
reserves, and ethnically discriminatory labor policies that are resulting in some brain drain
from its high-tech sector.
Chile is on its way to becoming Latin America’s first advanced economy, but it faces growing
headwinds as it seeks to sustain growth amid the commodity slump cycle and further diversify
its economy.
• Seize the opportunity… Chile is a market-oriented economy with high levels of foreign trade
and overall sound economic policies. It remains one of the most stable markets in Latin America.
• Trending… Chile has introduced attractive tax credits to boost R&D investment and to attract
foreign businesses and talent focused on building an innovation economy.
• Watch out for… Chile’s continued commodity export dependence amid a long-term downturn, recent labor reforms, and weakened public support for government reform efforts.
Poland has among the strongest three- to five-year economic outlook of the group, but faces
several key challenges to sustain this growth and reposition itself as an innovation-led economy.
• Seize the opportunity… Poland has growing strength in BPO, shared service centers, IT,
aerospace, defense, food specialty, and automotive manufacturing.
• Trending… Poland’s policy to let its currency float against the euro means that the economy is
at once benefitting from the weak euro that is spurring German exports, and at the same time
seeing its profits grow in local currency terms from the many foreign companies operating
inside its borders.
• Watch out for… Labor market rigidities, including high unemployment, stringent job
protection, and a growing gap between skills and job opportunities that the government has
yet to effectively address.
The geography of the new global economy
is better understood as transpacific, with
opportunities on both sides of the ocean.
Peru is one of the better-performing large economies in Latin America, but it has been hit hard
by the commodity slump cycle and a volatile electorate with high expectations of its government and little trust in its elected leaders.
• Seize the opportunity… Peru continues to be among the most open economies in Latin
America, and stands to gain from likely forthcoming trade agreements, such as the TransPacific Partnership.
• Trending… The Peruvian government is moving aggressively to secure private investments to
build needed transportation and energy infrastructure.
• Watch out for… Risk factors include high financial dollarization and vulnerability to foreign
monetary policy.
Mexico has passed an impressive reform agenda over the past several years (which it now
needs to implement), but still faces significant challenges that must be overcome to reach its
full potential.
• Seize the opportunity… Mexico is opening its economy to small and medium-sized enterprises as well as foreign investors to boost overall competitiveness, most notably with liberalization of the energy and telecommunications sectors and the introduction of anti-monopoly
reforms.
• Trending… Investors are demonstrating their confidence in Mexico’s reform and its enviable
positioning for production for the North American market with new investments, including
significant expansion and modernization of automotive production by Toyota, Ford, and VW.
• Watch out for… Narco-traffickers and corruption, which continue to pose a risk to security
and the overall business environment that investors cannot ignore.
The Philippines has begun to systematically address the many economic development
challenges it faces, and it could be a regional star in the coming years if a successor can pick
up the baton on President Aquino’s leadership and policy agenda.
• Seize the opportunity… A skilled workforce, increasing demand for work, and an improving
financial sector make the Philippines attractive for FDI or outsourcing.
• Trending… Despite potential economic shocks on the horizon, the Philippines has a resilient
domestic market due to steady growth in the services and construction sectors and strong
private consumption.
• Watch out for… The Philippines’ high vulnerability to natural disasters (typhoons, earthquakes,
flooding, and volcanic activity), which is made more acute by poor infrastructure and
widespread poverty.
Authors
Paul Laudicina, partner, chairman
emeritus of A.T. Kearney and chairman
of the Global Business Policy Council,
Washington, D.C.
[email protected]
Erik Peterson, partner and managing
director of the Global Business Policy
Council, Washington, D.C.
[email protected]
The authors wish to thank Samuel Brannen and Courtney Rickert McCaffrey for their valuable contributions.
About the Global Business Policy Council
A.T. Kearney’s Global Business Policy Council, established in 1992, is dedicated to helping business and government
leaders worldwide anticipate and plan for the future. Through strategic advisory services, regular publications, and
world-class global meetings, the Council is committed to engaging in thoughtful discussion and analysis of the
trends that shape business and government around the globe.
A.T. Kearney is a leading global management consulting firm with offices in more
than 40 countries. Since 1926, we have been trusted advisors to the world's foremost
organizations. A.T. Kearney is a partner-owned firm, committed to helping clients
achieve immediate impact and growing advantage on their most mission-critical
issues. For more information, visit www.atkearney.com.
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2020–Seven - AT Kearney

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