Transcript - Episode 1: Beyond the BRICs, where do the pockets of opportunity lie?

Hannah Audino: Welcome to the first in our new series of economic podcasts in which we’ll be focusing on the issues affecting the global economy and how they could impact businesses.

I’m Hannah Audino and I’m an associate in our economics team in the UK. I’m joined here today by Barret Kupelian, a senior economist, to discuss a recent piece his team wrote on the pocket of opportunity in the global economy. So Barret, first off, can you tell us a little bit about your motivation for writing this piece and how it’s relevant to businesses?

Barret Kupelian: Well Hannah, when our clients come in to PwC and ask us about where to expand, they almost overwhelmingly focus on the large economies of the world, known as the E7 - which is basically the BRIC economies, Brazil, Russia, India, China as well as Turkey, Mexico, Indonesia. But, what I always say is big is not always better and the reason why I’m saying this is because converting the trust and reputation of a business into a full time revenue stream in a new market takes a lot of time, particularly in the largest economies that I just mentioned. So we always think that mid-sized economies should not fall off the radar of businesses that are seeking to grow their international footprint, and what we did in this report is that we focused on these mid-sized economies which we called the ‘pockets of opportunity’ precisely because we think they offer the best short to medium term prospects for businesses looking to grow.

Hannah: Great, so let’s move onto the actual countries, what’s the first one you want to talk about?

Barret: So the first one I want to talk about is Vietnam. We focused on three different economies in three different continents and Vietnam was the Asian economy we focused on. Now just to set the context about the Vietnamese economy and how it’s performed historically - in the 21st century, the Vietnam economy grew by 6.5% per annum. If you look at other Asian economies, the Asian 5 for example, they grew at a rate of 5% per annum, so you can see quite clearly that Vietnam over performed these economies. Now currently growth is being fuelled by domestic and foreign investment in labour intensive industries in Vietnam and the main reason why this is happening is because Vietnam has relatively low wages - they’re around a third of that of China actually.

Hannah: So, are they going to try and replicate the Chinese investment model?

Barret: Exactly. So Vietnam is trying to sort of replicate the investment export model that Japan, South Korea, China, Singapore, all have gone for, and there’s two pieces of evidence that support this point. The first one is Vietnam is using foreign direct investment as a tool to move its economy from a current sort of high volume, low cost base to a more high value added focus base. A classic data point that we sort of mention to our clients is if you look at Vietnamese exports 10 years ago it was based on commodities, the largest export that Vietnam had was commodity related. If you look at the latest data though Vietnam’s largest exports by value these are now in mobile phones, so you can clearly see the actual shift happening there. And the second point, and this is quite topical actually, Vietnam is now the second Asian economy to complete negotiations on a free trade deal with the EU, which actually covers both goods and services. Now I think the final point is quite important because it almost shows how willing the authorities in Vietnam are to set up the sort of foundations for the long term transition of the Vietnamese economy from a manufacturing base to a services base once the demographics conditions sort of start to change, which we’re also by the way seeing happening in China.

Hannah: So moving now onto Europe, which economy have you chosen to focus on?

Barret: So in Europe we focused on Poland as our sort of second pocket of opportunity. As you know Hannah, in the team, we track Poland regularly. It’s one of the 28 economies we monitor on an active basis.

Hannah: I think it’s the one I monitor actually.

Barret: And yeah, rightly so. And just to give you a bit of context as everyone knows Poland joined the EU in 2004. Interestingly it was the largest economy out of the 10 economies that joined then and unlike most advanced economies it managed to escape relatively unscathed from the financial crisis.

Hannah: So would you say Poland’s made the most out of its EU membership?

Barret: Exactly. I think Poland has made the most out of its EU membership and you can see this in the way it uses its comparative advantage of, first of all, a good geographic location being relatively well located in central Europe, and secondly of relatively low labour costs - the hourly labour costs in Poland is €9 per hour compared to the EU average which is €25. And the third point that Poland has really focused on as well is keeping its economy open to FDI flows. So the OECD estimate that Poland has a more liberal regime as far as FDI is concerned compared to other rich economies you know like South Korea, the US, Australia, Canada and if you look at the FDI stock in Poland it amounts to around 200 billion which is around 50% of its GDP which is not bad going for an economy that joined the European Union in 2004.

Hannah: But what about its ageing populations, what are the prospects of the Polish economy going forward?

Barret: Well in the short term we think Poland will grow by around 15-16% in volume terms and by short term I mean the next 5 years. Now you’re right in saying that Poland is going to face a challenge as far as its ageing population is concerned. Now the government and the authorities are taking notice of that and they have a plan in place to help boost research and development spending in the medium term and hopefully that will sort of offset some of the negative effects of an ageing population.

Hannah: And moving on to the final country, which I believe is Colombia?

Barret: Yes that's correct Hannah. I mean what we tried to do there is to focus on the Americas, the whole continent, but in north America you’ve got the US and Canada so they’re quite big economies, advanced economies, which we didn’t really want to focus on for this. So essentially what we did is we focused in central America and south America and Colombia was the mid-sized economy that we think businesses should actually be monitoring and watching out for.

Now Colombia is facing some short-term challenges with respect to its reliance on commodities but given the stability in the commodity markets I think that that sort of cycle or challenge has sort of faded. I mean I think the biggest opportunity in the country is the authorities’ ambition to spend around US$60-70 billion on improving its infrastructure. And the government’s focus will be to build around 11,500 kilometres of roads and highways to improve connectivity. Now if you are an economist, a micro economist, what you say is ‘this will give a short term demand boost to the economy’, which is good for businesses that specialise in those sort of sectors, you know designing roads, building roads, delivering these sort of turn-key projects of the government, as well as a medium term supply boost to the economy by increasing its productivity levels. And just on that point Hannah, just to give you an example, the world economic forum does sort of a competitiveness outlook every year and if you focus on Colombia you’ll see that Colombia ranks 84th out of the 138 economies they look at for its infrastructure sort of index. So I think that’s a sort of a wise investment the government is doing.

Hannah: And I also understand there’s a new tax form in place from the beginning of this year?

Barret: Yeah, that’s a really good point Hannah. I mean what the government essentially is trying to do is to reduce the tax burden on businesses and the key reform they’ve enacted is to increase the VAT to 19%, so watch this space for more updates on this change.

Hannah: Thanks so much Barret for giving us an insight into the more mid-sized and emerging markets as opposed to the key 7.

Barret: You’re welcome Hannah.

Hannah: And if you’d like to hear more about what we discussed today please head to our website at www.pwc.com/gew

And thanks very much for tuning in. Please subscribe to our channel for future podcasts.