Trade wars hurt an already poor trade situation
The world has been turning inward for some time, peak global trade as a % of GDP was in 2008 and has since declined to 28.5% in 2016 and is expected to decline to as low as 25% in the midst of insular governments dominating Europe and the Americas.
Frontier Markets countries as a whole, rely even more on trade, and they have been hit hard. You can see in the chart below that until post-recession we have steadily declined and are now hovering at 1998-levels. It is all but guaranteed that the escalating trade war will have further reduced trade in 2018.
Part of this is driven by a protracted recovery from the Global Financial Crisis and part of this is driven by a steady decline in births. The global economy lacks the buoy of at least 3% natural population growth. Worse still, is that population growth is largely driven by people living longer rather than more births. The birth rate chart below shows that over the past 25 years, the global median has declined -1.8% per year while Frontier Markets as a whole have seen a -1.5% decline in birth rate annually.
The world as a whole is quickly approaching its population replacement ratio. Last year, approximately 50% of all countries had a birth rate lower than 2.1, the population replacement ratio. The vast majority of these countries are wealthier. As wealthy countries identify the fiscal issues with a diminishing working population and an increasing elderly population, certain realities will have to be recognized. A smaller population of working adults will have to help to take care of their parents, this diminishes the ability of these people to have kids as part of their time is taken by tending to parents. Furthermore, the cost pressures of taking care of the elderly and supporting their needs will create financial pressures. These countries will eventually, despite the ebb and flow of xenophobic governments continue to entice and woo the best and the brightest from Frontier Markets countries. Countries in the English commonwealth in particular have been very successful at this where places like Japan and South Korea have suffered from xenophobia and the economy has suffered because of this.
With the pressure and lure of developed countries, this present a material challenge to the growth of Frontier Markets’ domestic economies. Wealthy countries will continue to demand high-quality immigrants which means that Frontier Markets will be challenged to keep their best and brightest in an escalating war for talent.
It is not all negative. There are a few key ways that we think Frontier Markets can fight this, and we have listed those below.
- Going back to basic economics, specialization is the key. Each Frontier Market is obligated to find out what they are good at, and establish dominance in that area. Competitive advantage is likely only possible with this approach. Think of Pakistan/Bangladesh/Cambodia for textiles and garment manufacturing, Philippines and India for BPO, Cyprus and Panama for international finance.
- Leapfrog. In the same way that many countries have skipped landline phones for cell phones and mobile payments instead of checks, there is an opportunity for Frontier Markets to use efficient small-scale automation to obviate labor concerns in industries and sectors where retention is difficult or the skills are unavailable. There are material moral concerns with this approach, as it suggests that companies in Frontier Markets can succeed by hiring less in countries desperate for jobs. However, we think of this as a way to accelerate the economy. If farmers have access to cheap tools and systems that make the job easier, they are more likely to send their kids to school and give them at a successful.
- A proliferation of free-trade agreements within Frontier Markets. Free-trade agreements have been seen to add value for developed countries, but we know that the costs of many goods in Frontier Markets’ countries are prohibitively expensive due to foolish attempts to protect backward domestic industries. This is what drives beef to be more expensive in Sub-Saharan African than the United States, and what creates multiple issues for improving a standard of living.
This is a long and complicated topic, but we think it is something that any Frontier Markets investors should be thinking about. Companies that are impervious to these issues maintain a degree of stability that is attractive in high-growth markets. We are thinking of banks, telecoms, media, and those that are helping enable these trends through automation, small-scale machinery, and smart systems that make cheap solutions possible for the average business or consumer in Frontier Markets.