Developing nations poised to challenge USA as king of the hill
Posted 2/8/2007





By David J. Lynch, USA TODAY
Globalization long has been regarded as a made-in-America phenomenon, driven by Silicon Valley's technology, Hollywood's movies and Wall Street's cash. But suddenly, countries formerly on the periphery of world events seem poised to challenge American dominance of this age of global integration.

It's not only that developing countries are proving to be white-hot investment opportunities, though they are: the Morgan Stanley Emerging Markets index gained 242% the past four years. It's also that emerging markets, once known dismissively as the Third World, are now central to Americans' lives.
Not long ago, these countries were of interest only to the Peace Corps. Now, everything from the financial lifeline that makes possible the modern American lifestyle to the identity of your next boss, customer, competitor or cultural trendsetter likely can be found in the developing world.

"We're in the middle of the biggest shift in 200 years — since the Industrial Revolution. It's really that big," said Antoine van Agtmael, the investment manager credited with coining the term "emerging markets" in 1981.

The new prominence of emerging markets represents a sharp departure from the flurry of financial crises that tore through Mexico, Asia and Russia in the 1990s. Since then, scores of developing countries have cleaned up their balance sheets, slashed inflation rates and accumulated enormous stockpiles of hard-currency reserves. China alone sits atop a $1 trillion mountain of cash. Russia, Mexico, India and South Korea also are swiftly building their cash hoards, according to Treasury Department data.

Developing nations have gone from beggar to banker. The U.S. must borrow enormous sums each day to finance the gap between its anemic national savings rate and its consumption. Increasingly, those funds — largely raised by selling Treasury securities — come from poorer nations.

Through November, the most recent data available, more than 29% of the $806 billion in net securities purchases came from developing countries compared with just 5% in 1998, according to Bank of America. The river of capital flowing into the U.S. economy enables Americans to continue consuming beyond their means. But some analysts find it worrisome that the world's wealthiest nation now depends on loans from some of the globe's poorest countries.
"The average American doesn't realize where this liquidity comes from. Capital is supposed to flow from rich to the poor," says Joseph Quinlan, chief market strategist for Bank of America.

For the USA, the danger is that an unexpected development could cause emerging nations to retrench on purchases of dollar-denominated assets. What could trigger such a pullback? A sustained oil price decline that pinches Middle Eastern oil producers, a global economic slump or an outbreak of protectionism in the USA, says Quinlan.

Consequences in the USA

For more than half a century, Americans could take for granted that the world economy would orbit around them. No longer. The USA today produces about 30% of world output at market prices. That figure already is down significantly from about 46% in the aftermath of World War II, when European and Japanese factories lay in ruins. And it is headed lower still as China and India continue their ascent.

Over the next generation, fast-growing developing nations are expected to see a significant uptick in their share of world output from 23% today to about 33% in 2030, according to a recent World Bank study.

That shift has enormous consequences for Corporate America. "The change is from globalization going one way to globalization going every way. It's as much about what developing countries are doing as developed countries," said Mark Foster, a London-based Accenture consultant.

Assuming continued economic growth in the developing world, the ranks of the global middle class are expected to triple by 2030 to 1.2 billion, according to the World Bank. Today, a bit more than half of that free-spending group resides in developing countries. By 2030, almost all of it, 92%, will call the developing world home.

For multinational corporations, that means paying ever more attention to what's happening outside the United States and especially in Asia, Latin America, parts of the Middle East and Africa. Procter & Gamble (PG) CEO A.G. Lafley said in a Jan. 30 conference call that in the past several years, the company has "added about 1 billion consumers" to the ranks of those who have ever used or purchased its products. "We think we can add another 1 billion consumers over the next three to five years, and most of them are going to come from developing markets," Lafley added.

In the most recent quarter, P&G's developing-country sales outpaced its overall 8% sales growth. Examples: Sales of Crest toothpaste rose more than 10% in Russia, while Duracell batteries posted a 20% gain in Latin America.

Likewise, at PepsiCo (PEP), two-thirds of revenue growth is coming from the company's international operations and 60% of that from emerging markets, says Michael White, chief executive of PepsiCo International. "We've seen a real, material change in the performance of our emerging markets, and I expect it to continue," White told a recent panel at the World Economic Forum in Davos, Switzerland.

Those aren't isolated examples. FedEx (FDX), Manpower (MAN) and Caterpillar (CAT) all report impressive growth in their developing-world business. By 2010, GE wants emerging markets to account for 30% of its sales, twice the current level. "America is realizing for the first time that globalization is a two-way traffic," says Azim Premji, the billionaire chairman of Indian software firm Wipro.

Trends from China?

As the developing world's purchasing power grows, it is likely to exercise greater influence over global tastes. To date, U.S. brands such as McDonald's (MCD), Nike (NKE) or Apple (AAPL) mesmerize overseas consumers. By 2030, when the World Bank estimates that the number of middle-class consumers in China will exceed the entire U.S. population, Americans might be on the receiving end of as many trends as they start. Zhang Yimou, not Clint Eastwood, might direct the world's most-popular movies. Fast-food dumplings might rival burgers and fries. "New fashions, new trends … are just as likely, indeed more likely, to start in China and India or Brazil as they are today (to start) in Europe or the United States," says Uri Dadush, director of the World Bank's international trade department.

That's in the future. But already, Americans are being affected by the rise of multinational corporations based in the developing world. Once regarded as second-tier manufacturers of shoddy goods, companies in the most mature developing countries are making their presence felt by acquiring companies in the developed world. From computer research centers in North Carolina to steel mills in Oklahoma, American workers are finding their new boss often hails from far, far away.
Among the best-known acquisitions: Chinese computer maker Lenovo's 2005 purchase of IBM's (IBM) personal computer business. But there have been plenty of other deals.

Last month, Mexican bank Banorte bought UniTeller, a U.S.-based remittances company. That deal came two months after Banorte snapped up INB Financial of McAllen, Texas. Russia's Evraz coal and steel producer in January completed its takeover of Oregon Steel Mills of Portland, Ore. And in June, Brazil's Gerdau Group acquired Sheffield Steel of Sand Springs, Okla. European companies, too, are in the cross hairs: India's Tata Steel earlier this month purchased London-based Corus.
The dealmaking is among the first visible signs of the growing clout of emerging-market multinationals. In his new book, The Emerging Markets Century, van Agtmael profiles 25 companies — such as Mexican cement maker Cemex, whose U.S. operations produce more cement in the USA than any other company, and Indian generic-drug maker Ranbaxy — that qualify as genuine global powers.
To many Americans, the notion of innovative, market-leading companies based in areas where widespread poverty and disease still hold sway might seem extraordinary. But van Agtmael notes that, in fact, it was the Western world's 20th-century economic dominance that was unusual.

For centuries, trade and commerce were rooted, not in the USA or Europe, but in more distant parts of the globe. In 1820, for example, today's "developing" countries were the acknowledged economic powers, accounting for 68% of the world economy, according to economic historian Angus Maddison. As late as 1870, the Chinese economy was almost twice as large as that of the United States.

Viewed from this vantage point, the contemporary emergence of countries such as China or Brazil represents less a new phenomenon than a reversion to history's norm.

"We still hold onto notions that are dear to us but wrong," says van Agtmael. "We will not always be the center of the world."

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