The Kuznets curve

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May 11, 2021

Sixty-five years and counting: How the Kuznets Curve helps us understand the emerging market story.

What makes a country an emerging market? Many things, which is why this is often a complex explanation.

A graphic representation known as the Kuznets Curve may help. Named after economist Simon Kuznets1 in 1954, the ‘curve’ illustrates how countries evolve and how as they do so, the income of their population grows and what they consume changes.

As countries industrialize, countries progress up the curve. And initially inequality - as income per capita (the average income earned per person in a given area in a specified year) - rises before eventually declining.

Basic materials and commodities are the first building blocks for economic development; followed by the creation of a manufacturing base. Next comes infrastructure spending and then the gradual transition of the economy towards consumer goods and services. Later, luxury and lifestyle products become more important along with a greater focus on the environment and there is a confident, educated and relatively wealthy middle class.

Sound familiar? If you’ve been a reader of economic reports on places like China, then the question of whether China is now “developed” or still an emerging market is a familiar one. So where does China fit on the curve?

Today, we can see the Kuznets Curve in action in many parts of the developing world. Whether that’s in Brazil, which retains its position as a major exporter of iron ore, coffee and soy – or Bangladesh, which, like so many of its emerging market peers and predecessors, is using textile manufacturing as a springboard to greater things.

Vietnam, which just 30 years ago was one of the world’s poorest countries, saw its exports of electrical machinery increase almost 30-fold between 2008 and 2018.2 China, likewise, is gradually moving beyond its status as the world’s workshop as it transitions to a consumption-driven economy. Today, nearly half of its workforce is employed in the service sector and while German luxury carmakers saw weaker sales globally in 2020, brands such as BMW and Porsche had record sales in China.3

For the future, emerging markets are forecast to dominate the world rankings of wealth creation. According to one report, Nigeria is set to see its population of high net worth individuals balloon by a compound annual rate of 16.3% between 2019 and 2023. Next comes Egypt at 12.5% and Bangladesh at 11.4%.4

For investors, the obvious question is how to access the emerging market story. In the MSCI Emerging markets index5, for instance, China accounts for 34.22%, while a country like South Korea is 11.63%, Taiwan has a weighting of 11.69% while Brazil accounts for some 7.27%; smaller less developed countries such as Chile amount to 0.71% of the index. Leading sector weightings on this index include basic materials, industrials, consumer goods and services, financials, information technology and communication services. An alternative index is the Morningstar® Emerging Markets Large Cap IndexSM, which measures the performance of Emerging Market equity market targeting the top 70% of stocks by market capitalization. As with the MSCI Emerging Markets Index, China accounts for the largest country weighting, with 38.44%. In theory, such indices can provide exposure to a broad swathe of opportunity across many different parts of the Kuznets Curve.

Take a look at the BNY Mellon Emerging Markets ETF (BKEM), which seeks to match the performance of the Morningstar® Emerging Markets Large Cap IndexSM.

Download The Kuznets Curve Infographic

1 The foundations for what became the Kuznets Curve were laid in Kuznets’ presidential address at the 67th Annual Meeting of the American Economic Association on 29 December 1954.

2 WTO: ‘World Trade Statistical Review’, 2019.

3 ‘2020 Global: German Luxury Car Sales Worldwide, USA and China’

4 CNBC: ‘These countries are set to see their millionaire populations skyrocket in the next 5 years’, 16 January 2019.

5 The MSCI Emerging Markets Index stands for Morgan Stanley Capital International (MSCI), and is an index used to measure equity market performance in global emerging markets; the index captures mid and large cap companies across more than two dozen emerging market countries


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