How Emerging Markets Will Change Your World by Jeffrey E. Garten YALE School of Management August 19, 2008

How significant in global economy? INTRODUCTION Who are they? How significant in global economy? How will they affect global economic policy, prices, jobs? How will they affect trade and global competition?

How will they use their wealth? INTRODUCTION How will they use their wealth? How will they use their political power? What does it mean for you?

The paradigm for the global economy is shifting dramatically MAJOR POINTS The paradigm for the global economy is shifting dramatically Virtually every bit of conventional wisdom about finance, trade, technology, management, and geopolitics needs to be re-examined At the heart of these changes is the emergence of a number of countries that are moving from the periphery of international relations to the center The critical question you have to ask is whether your thinking, your strategy, your talent base is changing in a way and at a speed that is proportional to the shifts underway.

HISTORICAL PERSPECTIVE 1960’s – Colonial links 1970’s – Independent governments Resource nationalism Sovereign borrowing 1980’s – Further integration Debt rescheduling Efforts to attract foreign direct investment 1990’s – “Emerging” Increasing western interest Economic reforms begin in China, India Asian tigers take off Asian financial crisis

HISTORICAL PERSPECTIVE 2000 – Today Recovery from crisis and lessons learned Emergency of “BRIC” Broad base of investors Fear of contagion lessened

HISTORICAL PERSPECTIVE Rise of west in 15th and 16th century Emergence of Great Britain and then US in 19th and 20th century Now, rise of “the rest”*

WHAT IS IT THAT EVERYONE SEES?

HOW SIGNI FICA NT IN GLOB AL ECO NOM Y? POPULATION 2000 = 6 billion 1 billion in rich countries 5 billion in rest 2000 to 2050 = 6 billion to 9 billion 1.1 billion in rich countries 7.9 billion in rest Conclusion – All of the 3 billion new people will be added to developing world

HOW SIGNIFICANT IN GLOBAL ECONOMY? EMERGING MARKETS HOW SIGNIFICANT IN GLOBAL ECONOMY? POPULATION Population in 2000 = 6 billion Population in 2050 = 9 billion Incremental 3 billion will be almost entirely outside of rich countries Source: World Bank / UN

EMERGING MARKETS HOW SIGNIFICANT IN GLOBAL ECONOMY? GROSS DOMESTIC PRODUCT (ECONOMIC ACTIVITY) In 2000 rich countries = 75% global GDP, rest = 25% Today 50% of all incremental growth from developing world In 2050 rich countries = 32% global GDP, rest = 68% Source: World Bank

HOW SIGNI FICA NT IN GLOB AL ECO NOM Y? HIERARCHY OF NATIONS By 2050, probably before, China will be largest economy in world China United States India Japan Vietnam

HOW SIGNI FICA NT IN GLOB AL ECO NOM Y? HIERARCHY OF NATIONS TO COME

HOW WILL THEY AFFE CT GLOB AL POLI CY, PRIC ES, JOBS ? DEMAND FOR RESOURCES SUPPLY OF RESOURCES SUPPLY OF MANUFACTURED GOODS LOCATION OF INDUSTRY

HOW WILL THEY AFFE CT GLOB AL POLI CY, PRIC ES, JOBS ? ROLE IN GLOBAL SUPPLY CHAIN IMPACT ON INFLATION SOURCE OF INVESTMENT CAPITAL DEBTORS TO CREDITORS SOURCE OF LABOR COMPETITION

IMPA CT ON GLOB AL FINA NCE DEBTORS TO CREDITORS ASIA = 60 FX RESERVES CHINA = JAPAN = RUSSIA = INDIA = EU = PERSIAN GULF $700 BILLION/YEAR IN REVENUES FROM OIL

REAL IGN MEN T OF WOR LD ECO NOM Y NO LONGER SINGLE ENGINE WORLD ECONOMY MULTIPLE GROWTH ENGINES IMPLICATION SMOOTHER GROWTH PATH, LESS VARIATION? MORE SYNCHRONIZATION, ALL RISE AND FALL TOGETHER?

MAJ OR POP ULAT ION SHIF TS MASSIVE URBANIZATION TODAY – 180,000 TO CITIES NEEDED – CITY FOR 1 MILLION PEOPLE EVERY WEEK UNTIL 2050 ONE N.Y.C. EVERY TWO MONTHS UNTIL 2050

MAJ OR POP ULAT ION SHIF TS EMERGENCE OF MIDDLE CLASS 2 BILLION PEOPLE COULD CONSTITUTE MIDDLE CLASS WITHIN 25 YEARS COULD ACCOUNT FOR 60% GLOBAL GDP IMPLICATION: MAJOR SHIFT IN SPENDING POWER TOWARDS EMERGING MARKETS FROM RICH COUNTRIES