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Speaker 1: Emerging markets are where the growth is no weight. Emerging

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Speaker 1: markets are being hit by US interest rates and a

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Speaker 1: trade war? Can both be true? How do you separate

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Speaker 1: emerging market wheat from chaff? Welcome to Bensons. I'm Daniel Moss,

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Speaker 1: columnist at Bloomberg Opinion in New York. What actually is

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Speaker 1: an emerging market? And how do the really good ones

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Speaker 1: stay hot? Here to help us find out is Anu Madgavta,

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Speaker 1: a partner at McKinsey Global Institute in Mumbai. Now, Annu

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Speaker 1: is really the perfect person to help steer us through

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Speaker 1: this e M thicket. She's the lead author of a

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Speaker 1: McKinsey report called out Performers, high growth Emerging Economies and

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Speaker 1: the companies that propel them and who thanks for joining us.

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Speaker 1: Happy to be here. Let's start with a basic question

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Speaker 1: for which I rarely get a clear answer. What is

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Speaker 1: an emerging market? I mean, it's tough to say that

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Speaker 1: Mexico equals Malaysia equals Malawi? How should we be thinking

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Speaker 1: about this question? So you're right, Dan, emerging markets. You know,

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Speaker 1: there are a very large number of economies that are

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Speaker 1: variously called emerging or developing, and they're all actually very

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Speaker 1: different from one another. So we actually have focused on

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Speaker 1: the idea of economies that are growing rapidly. So growth

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Speaker 1: momentum is, you know, the most exciting feature of an

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Speaker 1: emerging economy for us. So we start by looking back

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Speaker 1: in time and really thinking about emerging markets as those

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Speaker 1: that weren't rich to begin with, and then really asking

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Speaker 1: the question of how fast are these economies narrowing the

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Speaker 1: gap between themselves and other richer countries. So looking back

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Speaker 1: to the mid eighties, we really look at which countries

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Speaker 1: weren't high income countries basically defined as at the level

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Speaker 1: of about six thousand dollars per capita of GDP at

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Speaker 1: that time, and we have a universe of about seventy

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Speaker 1: significantly large economies that sort of meet that criterion, and

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Speaker 1: then we filter from there a set that have actually

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Speaker 1: sustained very rapid per capita GDP growth over a twenty

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Speaker 1: to fifty year periods. So going back to the mid

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Speaker 1: sixties or then starting from the early nineties, over twenty

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Speaker 1: to fifty years, some of these countries seemed to become

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Speaker 1: very buzzy for a while, like Poland or Brazil, and

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Speaker 1: then fall on challenging times. What makes for a sustained

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Speaker 1: successful performance. Not many of these have actually stained performance

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Speaker 1: over long periods of time. We found just eighteen countries,

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Speaker 1: of which seven actually did it over fifty years and

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Speaker 1: another eleven did it over twenty years. So staying turbo

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Speaker 1: charged for long periods of time actually requires you know,

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Speaker 1: two or three essential elements. The most important of these

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Speaker 1: is actually a sort of culture and a set of

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Speaker 1: institutions that inspire and facilitate people to save and companies

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Speaker 1: to invest. So the whole savings and investment, the productive

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Speaker 1: use of the accumulation of capital, and then the productive

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Speaker 1: use of that capital typically has accounted for sixty or

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Speaker 1: more of growth amongst these eighteen outperformer economies that have

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Speaker 1: sustained growth over long periods of time. And then the

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Speaker 1: other aspect of what it takes to succeed is really

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Speaker 1: institutions that have fostered competition and innovation and therefore growth

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Speaker 1: in total factor productivity. And that's another roughly of growth. Well,

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Speaker 1: when you start talking about total factor productivity, you're starting

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Speaker 1: to lose me. I'm just a journalist looking only with

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Speaker 1: this list of eighteen, the vast majority of them allocated

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Speaker 1: in Asia. Is there a secret source for that region.

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Speaker 1: The set of countries that we call long term outperformers

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Speaker 1: who have grown over about fifty years are actually all

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Speaker 1: based in Asia. So here we include countries like China,

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Speaker 1: South Korea, Singapore, and then Malaysia, Indonesia, Thailand and so on.

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Speaker 1: So there is something about a sort of regional factor,

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Speaker 1: the fact that you know, one or two large economies

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Speaker 1: took off and that seems to have created some kinds

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Speaker 1: of kind of ripple effect around the region. But if

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Speaker 1: we look at the more recent set of out performers,

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Speaker 1: which are the twenty growth stories, we do find some

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Speaker 1: regional diversity there. We do have India and Vietnam, Cambodia,

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Speaker 1: Laos from Asia. But then you also have Central Asian

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Speaker 1: countries like Kazakhstan, Uzbekistan and Penistan which have grown over

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Speaker 1: a period of time on the back of very different drivers.

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Speaker 1: And then you actually have Ethiopia, which is in Africa,

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Speaker 1: of course, so not not really close close to Asia

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Speaker 1: in that sense. I'm so glad I knew that you

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Speaker 1: mentioned Ethiopia. For those of us who came of age

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Speaker 1: in the nineteen eighties, that seems like a head scratcher.

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Speaker 1: We're used to pictures of famine and live aid rock concerts.

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Speaker 1: What's going on with Ethiopia. I think Ethiopia has um.

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Speaker 1: While it doesn't have you know, it's not in Asia,

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Speaker 1: so it doesn't have the locational advantage of being near

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Speaker 1: a very large growth country or a growth cluster, but

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Speaker 1: it does have at least one other really important characteristic

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Speaker 1: tick that we see in common across the out performers,

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Speaker 1: and this is a set of very purposeful reforms that

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Speaker 1: have actually opened up the market as well as created

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Speaker 1: conditions conducive to investment. So Ethiopia came out of a

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Speaker 1: very difficult civil war phase, but then in the eighties

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Speaker 1: really started its first phase of reforms, which was very

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Speaker 1: farming and agriculture oriented. In the early two thousands they

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Speaker 1: actually moved into a much more infrastructure lad wave of

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Speaker 1: reforms and growth, and on the back of that have

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Speaker 1: been investing in a whole set of sectors and industries

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Speaker 1: across logistics, you know, different kinds of manufacturing, including labor

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Speaker 1: intensive manufacturing and so forth. So, like some of the

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Speaker 1: other recent outperformers, there is work still to be done

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Speaker 1: to sustain and in fact increased growth momentum. It's not

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Speaker 1: that Ethiopia or any of the other countries can declare victory.

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Speaker 1: But it's quite interesting that at least one country in

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Speaker 1: the Sub Saharan Africa region has actually taken off over

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Speaker 1: this period. How important is tried to being an emerging

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Speaker 1: market star. Trade is an important aspect of or a

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Speaker 1: common sort of aspect right of most if not all

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Speaker 1: of our out performers, simply because I think being connected

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Speaker 1: to the global economy has helped them do two things.

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Speaker 1: One is tap very rapidly into new sources of demand.

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Speaker 1: It's not the only source of demands, so domestic demand

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Speaker 1: has played a big role. Domestic consumption and investment has

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Speaker 1: played a big role in the growth of most out performers.

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Speaker 1: But trade has given a very very attractive growth opportunity

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Speaker 1: to many companies coming out of the emerging out of

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Speaker 1: the out performers. And then the other thing that global

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Speaker 1: connectedness has done, and I would say more, you know,

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Speaker 1: even more than trade. It's just being connected with the

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Speaker 1: rest of the world through all kinds of global flows

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Speaker 1: that include um, you know, flows of information data, financial,

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Speaker 1: flows of technology transfers f d I. It's just being

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Speaker 1: connected that is actually also encouraged and enabled more innovation

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Speaker 1: in many of the outperforming economies. So we would think

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Speaker 1: global connectedness is actually quite an important driver in addition

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Speaker 1: to the capital accumulation we already talked about. Sitting here

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Speaker 1: in New York and looking at headlines about tariffs, a

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Speaker 1: reasonable person might think that it was all over for trade.

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Speaker 1: There is the trendy narrative about deglobalization. What did you

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Speaker 1: discover when you drilled down about the dynamic of world

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Speaker 1: trade patterns? So it's certainly true that the top line

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Speaker 1: or the aggregate global trade as a share of GDP,

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Speaker 1: you know, just that one number has indeed declined ever

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Speaker 1: since two thousand and eight. But as you say, right,

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Speaker 1: if we drill down, what we do find is that,

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Speaker 1: first of all, it's really a goods trade that has

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Speaker 1: taken most of the hit UH and and most of that,

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Speaker 1: if not all of it, is really the value of

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Speaker 1: commodities within goods trade, so manufactured goods, particularly labor intensive ones,

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Speaker 1: you know, exports or trade, and these is still growing.

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Speaker 1: Services trade is still growing as a share of GDP.

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Speaker 1: The second important aspect is that the corridors of trade

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Speaker 1: are really shifting, and this is quite a profound shift.

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Speaker 1: So if we look at what we call broadly South

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Speaker 1: South trade, which is trade amongst between emerging economies as

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Speaker 1: opposed to emerging versus rich economies. So South South trade

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Speaker 1: has actually grown as a share of you know, global

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Speaker 1: trade and goods from something like eight percent to above

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Speaker 1: over the last fifteen years or so, and that's actually

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Speaker 1: quite dramatic. It's grown at you know, two to two

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Speaker 1: to three times the volume of all the other corridors

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Speaker 1: of trade that you can imagine what role does China

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Speaker 1: playing all this is China now important stuff that it

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Speaker 1: used to make. There are many interesting ways actually in

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Speaker 1: which China is reshaping not just it's trade or it's

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Speaker 1: trade with the US, but you know, some of these

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Speaker 1: obal trade corridors and opportunities. One one trend that we

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Speaker 1: see is that China is focusing more and more on

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Speaker 1: manufacturing and export of more knowledge intensive or R and

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Speaker 1: D intensive goods, particularly in the high tech electronics computers,

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Speaker 1: those kinds of spaces, and in a way receding or

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Speaker 1: seeding space in the lower value added types of manufacturing

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Speaker 1: like textiles and leather and so on. And some of

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Speaker 1: that export volume is actually moving moving to lower labor

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Speaker 1: cost countries like Vietnam and Bangladesh. So that's one shift.

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Speaker 1: The other important shift is that we think that China

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Speaker 1: is an engine of global consumption is also growing very rapidly.

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Speaker 1: Emerging markets overall will drive something like sixt of global

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Speaker 1: consumption out to thirty so they are collectively important as

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Speaker 1: drivers of global consumption. But China's role then that is

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Speaker 1: particularly large and important, and there will be parts of

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Speaker 1: that consumption that are actually going to be sourced from

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Speaker 1: other lower labor cost markets as well, because domestic consumption

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Speaker 1: of manufactured goods in China will pretty much continuously increase

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Speaker 1: for the next twenty years. People often talk about favorable

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Speaker 1: demographics in emerging markets. By that they usually mean young

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Speaker 1: populations or populations that are younger than in the developed world.

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Speaker 1: Can you drill down a bit for us, are some

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Speaker 1: of these societies starting to age and does that matter?

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Speaker 1: I think the demographics of emerging markets very quite a bit.

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Speaker 1: Going back to your opening question about you know, how

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Speaker 1: can you speak about them in the same breath, and

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Speaker 1: that's equally true of the aging profile. So you do

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Speaker 1: have in our universe the countries in the northern and

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Speaker 1: eastern part of Asia the Central Asian countries, these definitely,

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Speaker 1: uh you know, are going to see and are fairly

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Speaker 1: rapidly going to see aging, whereas you have South Asia

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Speaker 1: and then you have Africa where this is not going

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Speaker 1: to be the case. Right, But as you step back

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Speaker 1: and think about the drivers of growth, we did actually

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Speaker 1: find that you know, growth in labor supply was was

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Speaker 1: was a very very small part of the total growth

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Speaker 1: that that took place in the out performance. So growth

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Speaker 1: in productivity per worker is actually much more important. And therefore,

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Speaker 1: even as economies age, there are very important drivers of

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Speaker 1: productivity that still represent opportunities for unlock. In other words,

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Speaker 1: you have economies that are not completely urbanized, and we

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Speaker 1: know that urbanization actually lifts productivity by two to three

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Speaker 1: times compared to you know, living in rural areas. You

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Speaker 1: have economies where you know, financial access and financial inclusion

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Speaker 1: is not complete, and this is true even in regions

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Speaker 1: like Latin America, and we know that encouraging savings and

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Speaker 1: investment actually does drive up productivity. Many emerging markets have

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Speaker 1: big conglomerates that are either state owned or privatized to

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Speaker 1: government friendly groups. Is the way that these corporations have

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Speaker 1: a benefit for emerging markets or is it a hassle?

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Speaker 1: We think that the outperformer economy is actually many of

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Speaker 1: them for for whom you know, we have the data

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Speaker 1: and can study this feature. But we do find that

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Speaker 1: one really striking feature of these economies is the role

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Speaker 1: that companies of of a significant size have played in

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Speaker 1: driving their growth. Now, are these state owned or are

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Speaker 1: they private is but with substantial state or quasi state interests.

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Speaker 1: Our data set essentially covered companies that are publicly listed,

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Speaker 1: so whether they have a majority you know, state shareholding

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Speaker 1: or or a private shareholding, as long as they're publicly

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Speaker 1: listed and in some ways unswerable or their data as transparent,

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Speaker 1: that's the universe we looked at. But looking at such companies,

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Speaker 1: we find that the outperformers actually had twice the number

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Speaker 1: of large companies as other emerging economies did. That these

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Speaker 1: had actually grown much faster. So they had grown from

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Speaker 1: revenue to GDP of something like you know, in the

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Speaker 1: mid twenty percent region to the mid sixty percent region,

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Speaker 1: which is extremely rapid growth just in terms of sheer,

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Speaker 1: scale and scope, and there is there is reason to

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Speaker 1: believe that these companies are competitive in the US, we

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Speaker 1: wrestle with the role that automation and robots will play

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Speaker 1: as technology advances and as our workforce ages. When does

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Speaker 1: this become a problem for emerging markets and are they

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Speaker 1: equipped to deal with it? Automation and technology are fundamentally

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Speaker 1: very powerful opportunities to drive productivity in emerging economies, and

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Speaker 1: then because they do change the nature of work, they

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Speaker 1: also result in a new set of work opportunities or

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Speaker 1: a new type of job. Unemployment impact right now. Now,

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Speaker 1: how exactly this plays out depends to some extent on

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Speaker 1: the economic cost and benefit of deploying technology. So if

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Speaker 1: you think about a labor cost as a proxy for that,

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Speaker 1: we find that there are i think a large number

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Speaker 1: of low labor cost emerging trees, typically those where per

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Speaker 1: capita GDP is less than five thousand dollars or so,

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Speaker 1: where even over the next you know, ten to fifteen years,

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Speaker 1: these countries would in our opinion, have the potential to

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Speaker 1: raise both employment as well as GDP from manufacturing activities.

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Speaker 1: So the deployment of technology would allow them to raise

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Speaker 1: value add and productivity in manufacturing but also employment. Not

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Speaker 1: all countries fall into this bucket, So there are you know,

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Speaker 1: the higher, higher income emerging economies where this would not

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Speaker 1: be the case and where the questions around you know,

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Speaker 1: how can you actually create productive jobs in services? How

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Speaker 1: can you actually reskill and redeploy people from what they're

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Speaker 1: doing to the new and emerging areas within services sectors

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Speaker 1: is going to be actually one of the central challenges

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Speaker 1: as well as opportunities for emerging economies as as you

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Speaker 1: think about inclusive growth. Aw thank you for walking us

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Speaker 1: through the world of emerging markets. It's a pleasure. Thank you.

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Speaker 1: Benchmark will be back next week. Until then, you can

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Speaker 1: find us on the Bloomberg terminal, Bloomberg dot com, our

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Speaker 1: Bloomberg app, as well as podcast destinations such as Apple Podcasts,

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Speaker 1: Spotify or wherever you listen. We'd love it if you

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Speaker 1: took the time to rate and review the show so

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Speaker 1: more listeners can find us, and you can follow me

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Speaker 1: on Twitter at moss Underscore. Echo. Benchmark is produced by

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Speaker 1: Turf of Foreheads, the head of Bloomberg Podcasts. This Francesca leaving,

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Speaker 1: Thanks for listening. To see you next time on