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The S-Curve

Amit Sinha

(www.indicus.net)

The central idea is that when an economy’s GDP per capita passes $1,000, increased income begins to change patterns of demand and push economic activity into a new, high-growth phase.

I first saw the S-curve in detail about 10 years ago. I was then working in the cement industry. The per capita GNP and the per capita cement consumption of about 60-70 countries were mapped. The horizontal scale was per capita GNP and the vertical scale was the per capita cement consumption. The countries were marked on this grid.

It was fascinating to see that most countries were placed along a trajectory that was in the shape of an S. There was considerable scatter, but the basic S-shape was discernable. The implication was that as long as the economy was at low income levels, growth in consumption was low. When it reached a certain critical mass (Typically about per capita $2,500 ppp), it moved into a significantly higher growth trajectory (the middle portion of the S). Mature economies had low growth and even a decline in consumption, the upper end of S. The higher growth trajectory had at that time already been witnessed in SE Asia and China.

This excited us a lot and we set about projecting the GDP and estimating the take off point for the Indian economy and cement, steel and other basic goods in particular. We came to the conclusion that if all our assumptions were correct, 2003-2005

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should be the take off point. This was no rocket science, plain interpretation of broad data and empirical evidence.

On hindsight, we now know that we were fairly accurate. The economy did take off to a higher growth trajectory at around that time.

Where does the take off actually start? There are various views and the empirical data suggests that though the take off is certain, the exact point is uncertain. The central idea is that when an economy’s GDP per capita passes $1,000, increased income begins to change patterns of demand and push economic activity into a new, high-growth phase. There are schools of thoughts that consider per capita GDP per capita as the more appropriate indicator. GDP per capita can signal shifts in consumer demand, because of which it is a yardstick that multinational corporations use to figure out whether a country’s population is ready to buy their products, from ordinary soaps to higher end mobile phones. Under $1,000, people buy basic commodity goods, loose and unbranded, in open markets. Above $1,000, they begin to buy slightly better food, beverages, clothing, basic packed and branded goods, and by $5,000 they are buying predominately branded products.

The $1,000 idea originates with the S curve, a statistical pattern developed for investments by Roger Babson in the 1920s that Michael Howell adapted to emerging economies in 1992.

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