Opinion: The critical role of outperforming emerging economies in poverty reduction

Workers at a factory in Zhejiang, China. Photo by: ©ILO / CC BY-NC-ND

At the World Bank-International Monetary Fund Annual Meetings in Bali, Indonesia, this week, some congratulations are in order when it comes to the key goal of eradicating extreme poverty: About 1.1 billion people worldwide have been lifted out of extreme poverty in the past three decades, reducing the share of the world population that continues to live in abject conditions from 35 percent of the global total in 1990 to just 11 percent in 2013.

World Bank annual meetings face politics, global debt, and climate disasters

The 2018 annual meetings have kicked off in Bali, Indonesia, against a backdrop of stark climate change warnings, economic uncertainty, and geopolitical rivalry.

Less acknowledged are the key reasons for this decline, and the limited subset of countries where it has taken place. We have taken a closer look at the data as part of our new analysis of the economic performance of 71 emerging economies, and specifically their per capita gross domestic product growth over 50 and 20 years.

We find that 18 countries that have outperformed their peers — about 1 in 4 — are responsible for 95 percent of this poverty reduction. China and India have led the way; these two countries alone have lifted about 900 million people out of extreme poverty. But other outperformers, including Indonesia, have also played a disproportionate role.

In seven of the 18 countries, GDP per capita expanded at an annual average of at least 3.5 percent over half a century, from 1965-2016: China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, and Thailand. Eleven other emerging economies experienced GDP per capita growth of at least 5 percent for 20 years from 1996-2016: Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan, and Vietnam.

How was this rapid poverty reduction possible? And what lessons could be learned by other emerging economies, with the goal of continuing the trajectory? Our research highlights two key factors that contributed to the economic and social progress among the 18 outperformers.

First, they put in place pro-growth policies that encouraged rising productivity, income, and demand. Among the key measures were steps to increase capital accumulation, sometimes by forced saving, and a push to improve government effectiveness. These policies led to annual growth in real wages and benefits of 5.3 percent among the long-term outperforming economies between 1980-2013, and wage growth of 6 percent for the most recent outperformers, between 1985-2016.

Critically, the policy measures also often included steps to create more competitive dynamics in the domestic market. This has spawned a generation of large companies that have driven a significant part of GDP growth in these economies. The abundance — and competitiveness — of these firms, public companies with annual revenue of $500 million or more, are the second key characteristic of the 18 standout economies we identified. These countries have twice as many large firms as other developing countries, adjusted for the size of the economies, and these firms not only helped boost GDP but also served as catalysts for change in how business is done in their countries.

Looking at the contribution of large firms to overall economic growth, we see that in the 18 outperforming economies, their revenue relative to GDP almost tripled from 22 percent in 1995 to 64 percent in 2016. That is near levels in high-income countries and greatly exceeds levels in other emerging economies. Their contribution of value added to GDP also rose sharply in this period, from 11 percent to 27 percent.

Increased prosperity in these countries has been accompanied by better health and education, helping meet other Sustainable Development Goals. In India, for example, the number of citizens living in extreme poverty fell by 25 percent between 1990-2013, while life expectancy rose by more than a decade. In China, the number of those living in extreme poverty fell by 78 percent, while average life expectancy at birth rose by seven years and the expected length of education increased by 4.7 years. In all long-term outperformers outside of China, the average life expectancy at birth rose by 6.4 years and students spent an additional 4.1 years in school.

Can the growth and poverty-reduction momentum be maintained? Change is in the air, and the specific path taken by the 18 outperformers may not be as effective for other countries aspiring to join their ranks. In particular, manufacturing growth — a key element for development in China, for example — is peaking earlier than in the past in emerging economies.

Automation is challenging companies and economies everywhere. Trade patterns are also changing, too, with the openness to trade that benefited the 18 outperformers being increasingly challenged by political leaders or undermined by protectionist moves. Yet we still see strong potential and opportunity for emerging economies to remain the engines of global GDP growth and to continue reducing the numbers of those living in poverty — and indeed, some of the new trends bring considerable opportunities. For example, as China shifts from low-cost manufacturing to higher-value research and development-based manufacturing, it may create room for other low-income countries including Bangladesh and Vietnam to grow their manufacturing sectors, such as textiles.

All emerging economies will need to do their homework to keep up the growth momentum. If the other 53 emerging economies we looked at were to match the productivity growth found among the 18, the global economy would be $11 trillion richer by 2030 — the equivalent of adding another China. And tens or hundreds of millions more people around the world would be able to escape poverty’s clutches.

Catch up on what happened at the World Bank Annual Meetings in Indonesia, where Devex reporters Michael Igoe and Sophie Edwards were on the ground.

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About the authors

  • Original%2520%252850%2529

    Anu Madgavkar

    Anu Madgavkar is a partner with the McKinsey Global Institute, McKinsey’s business and economics research arm. Anu joined MGI in 2011 and leads teams based in India, working on global as well as India-focused research.
  • Jonathan%2520woetzel

    Jonathan Woetzel

    Based in China since 1985, Dr. Jonathan Woetzel has been instrumental in building McKinsey & Company's China office. In addition to his work helping Chinese and other Asian businesses prepare for global growth, Jonathan is a director of the McKinsey Global Institute, McKinsey's business and economics research arm. He also leads McKinsey's Cities Special Initiative and is responsible for convening McKinsey's work with city, regional, and national authorities in more than 40 geographies around the world.