The new global opportunity

turkcell.top.jpgA call center for telecom company Turkcell, which runs an education program for Turkish girls. By Michael Elliott, contributor


FORTUNE -- Unless you spend all your time looking at GDP figures, the $58 trillion global economy is almost too big to fathom. In a famous 1995 article in Prospect magazine, the British writer Nico Colchester attempted to make this immense figure more manageable by imagining the world economy as 26 Italys. Italy, he thought, was a convenient unit of account (back then its economy was worth roughly $1 trillion). Besides, all of us sort of know what Italy looks like and makes. As an economy you can picture it.

The world has moved on, the global economy has grown, and these days Colchester's analogy feels a little Eurocentric. Let's update his idea and give it an American twist: Think of the world economy, very roughly, as 32 Californias. (California today is about $1.8 trillion strong.) The U.S. accounts for eight of them; the European Union plus Switzerland and Norway, Canada, Australia, and New Zealand make up another 10½. Prosperous Asia -- that's Japan, South Korea, Taiwan, Hong Kong, and Singapore -- gives you another 3½ Golden States.

That already gets us to 22, meaning the rest of the world -- the BRICs, the whole Islamic world, including its oil-rich states, most of Southeast Asia, all of Latin America, and Africa -- is the equivalent of 10 Californias, with China accounting for about a third of that output.

Now let's divide the world another way: The population in the first group of wealthy countries is about 1.1 billion, or 16% of the world's total. The rest of the world is home to 84% of the planet.

This enormous disparity between the distribution of the world's population and its economic wealth has led to two distinct arguments. First there is the case that global inequality is both wrong and dangerous. It's wrong because we diminish our humanity if we in the rich world allow billions to live stunted and miserable lives when they don't need to; it's dangerous because poverty and disease don't stay confined. When the movement of people, pathogens, and weapons is easier than it has ever been, the resentments, diseases, and grievances of the poor risk making everyone's life miserable.

The second argument is concerned less with morals and security and more with markets. The pragmatist looks at the world and sees 4 billion producers and consumers whose appetites and ingenuity have not been fully tapped -- sees, in other words, huge opportunities for economic growth and corporate earnings.

Though these two theses are often advanced by folks who like debating each other -- antipoverty activists and corporate titans, for example -- there's a growing appreciation that they are not in conflict. As University of Michigan Business School professor C.K. Prahalad argued in his enormously influential book The Fortune at the Bottom of the Pyramid, first published in 2004, "If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity can open up." The opportunity that Prahalad had in mind, it bears stressing, was not just one for corporations; explicitly, he posited that a partnership between businesses and poor people was a better way of helping the poor than conventional poverty-relief policies.

The work of Prahalad, who died suddenly in April at age 68, provides much of the intellectual background to a Global Forum that Fortune is hosting with our corporate cousins Time magazine and CNN in Cape Town on June 26-28. The timing couldn't be better, because the forum will take place right in the middle of soccer's World Cup, a tournament that defines a connected world. On July 11 more people will be doing precisely the same thing at the same time -- watching the cup final on TV -- than has ever been the case in human history. More than 300 leaders of business, government, and civil society will join us at the forum in Cape Town for what Rob Davies, South Africa's minister of trade and industry, calls "the business and economic centerpiece of the World Cup period."

When we were planning the forum, we took as our theme the "new global opportunity," a phrase that is deliberately ambiguous. On the one hand, it illuminates the prospects for businesses as they refine their product offerings for those at the bottom of the pyramid. But this sense of a new global business opportunity was only half of what we meant. As the world emerges from the Great Recession, there is another opportunity, to build a global economy that is more inclusive than it has been -- that brings the benefits of economic growth to those who have been marginalized in the past, whether because of location, social status, or sex.

What will it take to make the new global opportunity happen? Everyone at Cape Town will have his own prescription, but here's mine: China has to keep knocking our socks off, Africa has to catch up, and women have to be recognized as the key to economic success. Let's look at those factors in turn.

In 1987, I wrote an article on the emergence of great companies based in the developing world. It had more than 8,300 words (those were the days), and not one of them was "China." When I mentioned this recently to Michael Enright, a consultant and business professor at Hong Kong University, he pointed out that if I'd written the piece 10 years later, China might still have merited only a sentence.

Times change. Last year there were 37 Chinese companies on the Fortune Global 500, and the number is only going to increase. From oil giants such as CNOOC and Sinopec, to network equipment manufacturers like Huawei and ZTE, to telephone operators like China Mobile, Chinese firms have become household names in the corporate community. China has become a true motor of the global economy -- according to official figures, it grew 8.7% in 2009 and its role as both a market and a supplier of goods and services to the rest of the world is now established. How will it play out?

On the consumption side of the equation, the picture is clear. China is a huge and growing market. It managed its stellar growth in 2009 despite a fall in the value of its exports of 16%, and while part of that success is explained by China's enormous investment in infrastructure, China's domestic consumption patterns turned out to be far more robust than most Western economists had predicted when world trade contracted after September 2008. China has tens of millions of people with oodles of disposable income; a major property developer in China told me recently that a third of the purchasers of his high-end apartments paid cash.

But it isn't just real estate -- long a safe haven for Chinese money anywhere in the world -- that consumers are buying. The real test of China as a market comes when you consider goods and services that you don't expect it to consume. Looked at solely in terms of GDP per head, at $6,000, China is a poor country. But by 2007, according to a report by the research center of Li & Fung, the Hong Kong-based logistics and trading company (itself one of the engines that make globalization go), it was already the world's second-largest market for luxury goods after Japan.

Tapping into that demand, in the past few years Li & Fung's Trinity unit has been buying or licensing high-end European brands such as Cerruti 1881, Gieves & Hawkes, and Hardy Amies, a bespoke tailor on Savile Row in London that was for years known as the Queen's dressmaker. You might think that there would be little demand in China for apparel from companies whose stock-in-trade is silk ties, Oxford college scarves, and blazers. After all, it wasn't long ago that the only suit a Chinese man owned would be a shapeless sack made out of some rough man-made fiber. You'd be wrong. Sunny Wong, Trinity's managing director, told me that just as consumers in the developing world "leapfrogged" the limitations of fixed telephone lines for sophisticated mobile phone services, so Chinese men have bypassed middle-market apparel. They've gone straight from shabby to stylish without stopping at drab. Wong expects the Chinese market for high-end male apparel to continue growing at something like 15% a year.

What about China as a source of innovative products and services? Here the picture is more mixed. Enright says that the vast majority of product innovation in China's technology sector continues to be accounted for by entities that depend on foreign investment. So far only a handful of companies, such as Huawei and ZTE, or Haier, a maker of consumer appliances, compete in advanced markets with established brands, the test that made world-beaters of Japan's branded companies in the 1960s and 1970s.

Enright points out that genuine innovation is starting to be seen in sectors such as coal chemistry and solar power, which makes sense; China is both coal-rich and desperately worried about energy security. With much assistance from the government, Chinese firms such as Suntech Power (STP) are becoming world leaders in solar energy. Western companies, meanwhile, have invested heavily in R&D facilities in China. GE (GE, Fortune 500), in particular, touts its experiences with "reverse innovation," by which products developed for the poor world can be hits in the rich one too. A key example is a portable, PC-based ultrasound machine built originally for the Chinese market, which by late 2007 was being offered at a price point of $15,000, a fraction of what high-end devices cost.

It makes sense to believe that in the next 10 years we will see many more examples of relatively cheap goods produced as a consequence of reverse innovation, and we need to. Most of the world remains poor, so products and processes that are designed with poor people in mind are vital. That's why business journals celebrate the impact of cheap, reliable mobile phones with extraordinarily low costs of use not just in India -- where companies such as the mobile giant Bharti Airtel pioneered the model -- but in much of Africa too.

Africa matters. If China's growth is the epitome of the way the global economy is changing at warp speed and improving the lives of hundreds of millions on the way, then conventional wisdom holds Africa to be its polar opposite. We've long been used to thinking of Africa as a continent scarred by endless wars, disease, and corruption.

That impression is not wholly false. Africa is the world's poorest continent. Living there are some 70% of the world's poorest people. But poverty and despair are far from the whole story. Fueled by buoyant commodity prices, the period before the onset of the Great Recession marked Africa's best period of economic growth in a generation (output grew by more than 6% in 2007 and 2008%) -- and even in 2009 the continent as a whole managed to grow by 2%. The next step is to do something valuable with the resources you've either killed or dug out of the ground.

In 1987, I visited a tannery in Kenya supported by the Aga Khan Fund for Economic Development, which, unusually, was not exporting raw hides but finishing them into high-quality leather for shoemakers in Europe. Keeping the value-added at home, the tannery's manager told me, was vital to its success. Nearly a quarter-century later that's still true. The first step in African development, says Patrick Dupoux, who helped write a new Boston Consulting Group (BCG) report on growing African companies: "Optimize your natural resources. Provide more value-added than you have in the past."

Even if you do that, making a success of business in Africa is hard. Markets are small and fragmented; Africa doesn't provide the domestic scale that Chinese companies can tap into. Transportation is often difficult. The first step for ambitious companies, says Dupoux, is "to go outside their home country." But it isn't easy: Of the 40 companies that BCG identified as "African challengers," 17 are from North Africa (countries such as Morocco and Algeria), just across the Mediterranean Sea from Europe, and 18 from South Africa. The host nation of our forum is the home of the three companies (Anglo-American, SABMiller, and Old Mutual) that the consultancy considered the only African companies that were true global players.

But Dupoux, who is based in Morocco, has absolutely no doubt that a trend toward greater business competitiveness is under way throughout Africa. Poverty demands creativity of entrepreneurs. African companies, the BCG report points out, are "unencumbered by legacy assets and business models." Like those Chinese businessmen leapfrogging into bespoke suits, banks are jumping into electronic banking without ever having built large branch networks.

Economic success doesn't always translate into a healthier country; too often it does little but fuel corruption, as political elites grab all the diamonds, oil, and timber they can. Why do some countries do better than others, even allowing for differences in natural endowments? What really accounts for China's success, for example? Why do experienced observers like Singapore's Minister Mentor Lee Kuan Yew believe that India -- the other giant developing economy -- is only going at "about 60% of China's rate of change"?

It's not because China has more natural resources or skilled bureaucrats or natural entrepreneurs. It's not because India's government is chaotically fragmented, and China's disciplined and much more centralized. (All that is true, by the way.) Hong Kong University's Enright puts his finger on it. "Whenever I'm asked what a country can do to compete with China," he notes, "I say, 'The first thing is, Educate your women.'" Give Mao some credit. Even in the darkest days of unreformed communism, China educated its women, with the consequence that it now has an adult female literacy rate of 90%. India's is just 54.5%.

But if girls and women are really to play their full role in leading nations out of poverty, Maria Eitel, president of the Nike Foundation, argues, education alone is not enough. The real multiplier effect comes from linking education to some sort of economic opportunity. And that has to start early, when girls are in their teens, before they are forced by social and family pressures to marry and have children. If adolescent girls can be helped along the road to economic independence -- given a microloan to buy a cow or a beehive, for example -- then the economic equation for the family changes. A father realizes that it makes more sense for his daughter to stay in school and earn some money on the side, rather than being forced into early marriage. Policy focused on girls, says Eitel, "is uniquely capable of breaking the intergenerational cycles of poverty."

I don't think it is at all coincidental that many of the initiatives that C.K. Prahalad celebrated in The Fortune at the Bottom of the Pyramid had women at their center. Prahalad brought to wider attention companies like Amul in India, the largest processor of raw milk in the world, which depends on women collecting milk from 10,000 villages.

It would honor Prahalad's memory if we could multiply examples like that 10,000-fold. Then we might be able to dimly see the outlines of a world economy in which globalization's benefits did not accrue disproportionately to consumers in the rich world, and in which innovation was not a one-way street, a gift bestowed (on their own terms) by developed nations to those still poor, but rather flowed around the world, benefiting all. That's the new global opportunity. One from which we would all benefit. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.41%4.44%
15 yr fixed3.33%3.31%
5/1 ARM3.34%3.55%
30 yr refi4.39%4.41%
15 yr refi3.31%3.30%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Company Price Change % Change
Comcast Corp 49.17 0.78 1.60%
Applied Materials In... 18.92 0.06 0.32%
Frontier Communicati... 5.86 0.21 3.72%
U.S. Bancorp 40.47 -0.54 -1.32%
Oracle Corp 40.13 0.40 1.01%
Data as of Apr 16
Index Last Change % Change
Dow 16,424.85 162.29 1.00%
Nasdaq 4,086.23 52.06 1.29%
S&P 500 1,862.31 19.33 1.05%
Treasuries 2.65 0.01 0.57%
Data as of 9:21am ET
Sponsors

Sections

The company continues to struggle with convincing marketers to pay as much for mobile ads as they do for desktop ads. More

Indian markets are riding high as investors bet that an election and new administration will cure some of the country's economic ills. More

The company continues to struggle with convincing marketers to pay as much for mobile ads as they do for desktop ads. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

Pamela Knighton, a 51-year-old social worker from Cuthbert, Ga. who earns less than $25,000 a year, had been really looking forward to her $4,300 tax refund last year. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.