How Rich Are We?

How Rich Are We?

Terms like ‘emerging’ or ‘developing’ economies, and measuring growth using GDP are completely outdated, according to a new study. It suggests that excessive dependence on macroeconomic data can be damaging and counterproductive to what really counts. New terminology is needed to move beyond ‘macroeconomics’ and ‘emerging economies’ in order to identify new areas of growth.

The study on ‘Fast-Expanding Markets’ (FEMs) co-authored at University of Cambridge Judge Business School, suggests that there are fundamental problems to a rigid adherence to a macroeconomics-based analytical approach, including a mistaken belief that history will repeat itself in a linear fashion in the future (according to a population forecast in the early 1900s, the U.S. would have been 80 percent Italian and Polish by 1930 if trends had followed a linear progression).

Our unquestioned loyalty to macroeconomic data is way past its sell-by date, looking only at a country’s GDP tells us some things about overall growth, but it doesn’t tell us about the workforce or regional development or wealth disparity. Focusing on FEMs provides a bottom-up approach that can reveal where opportunities lie and where they may have been missed.”

For example, many big Western companies lured by the macroeconomic data of China, a country recently growing by 9 percent a year, have been sourly disappointed by the local realities: Home Depot entered China in 2006 and pulled out completely in 2012, not anticipating that the do-it-yourself culture of the U.S. wouldn’t translate into a country with abundant and relatively cheap helpers. Similarly, attention to gloomy Japanese macroeconomic numbers masked encouraging ‘pockets of exceptional growth’ such as the fast-expanding market for light-emitting diodes (LEDs) in Japan.

The scandal over Volkswagen’s diesel engines, though tragic for Germany’s engineering sector, will surely help development of cleaner engines or better electric cars – creating or accelerating a fast-expanding market. Likewise, the stream of tens of thousands of refugees into Europe, difficult as it is, holds the promise of exciting new market opportunities.

Central banks and other policymakers have been wrestling with the limitations of traditional economic terminology and theory. So an alternative focus on ‘Fast-Expanding Markets’ (FEMs) would help policymakers and business strategists identify and nurture new areas of growth, argues the paper published in Thunderbird International Business Review. Such FEMs cross industries and countries, and include mobile banking in France, Western-style cheese in India and food trucks in the U.S. (growing annually at a double-digit rate in recent years).

This new FEM terminology recognises a wide swathe of important economic activity and, at the same time, reflects the fact that the terms ‘developing economies’ and ‘emerging markets’ have lost much of their usefulness given that China, which was recently classified in those ways, is now the second-largest economy in the world.

More than 40 FEMs around the world were studied, ranging from the Vitamin D testing market in Italy (which benefits from humans’ increasing lack of direct sun exposure), to organic food production in Spain (with a downturn in the property market, the government drove policies to convert land to organic farming), to video game production in Turkey (designing games that conform to Islamic values).

The study acknowledges that many may dismiss such markets as insignificant compared to major global industries like machine manufacturing, yet the authors contend that such a response leads to losing out on new insights and opportunities that such pockets of excellence can generate.

One of today’s catchiest buzzwords is growth.

“Talking about growth is easy – but finding ways to achieve it is daunting at the very least. Macroeconomic data, while useful, can be misleading in guiding business decisions in specific markets. Analysis, decisions and actions need to go at a much more granular level.”