Comparative Regional Economy <Lecture Note 7> 2012.06.11

CRE: Outlook of Regional Economies-Long Term

* Some parts of this lecture note are borrowed from some references for teaching purpose only.

Professor Yoo Soo Hong Monday: 2-5 p.m. Office Hour: By Apointment E-mail: yshongys@gmail.com M.P. 011-626-9850

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Key Drivers of Long-term GDP Growth

− Growth in the physical capital stock, which is determined by new capital investment less depreciation of the existing capital stock

− Growth in the labor force

− Growth in the quality of labor (human capital), which is assumed to be related to current and projected average education levels in the workforce

− Technological progress, which drives improvements in total factor productivity (TFP)

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Projected Real Growth in GDP and Income Per Capita2007-50 (% pa)

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Projected Real Growth Rates of Emerging Economies: 2007-50 (%pa)

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Other Emerging Economies

− Vietnam: it has the potential to be of similar scale to Turkey by 2050, although still only around 70% of the projected size of the UK economy.

− Nigeria: it stands out as having considerable growth potential, not far behind India in terms of projected annual growth, close to Turkey in terms of projected size and overtaking Egypt and South Africa to become the largest African economy by 2050.

− Pakistan also ranks relatively high in growth terms, due in part to having one of the highest projected population growth rates. recent political problems do not pose a barrier to fulfilling the country’s long-term economic potential. Political problems are major downside risk factors at present.

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− Malaysia and Thailand have more solid track records of long-term economic growth.

− Saudi Arabia has more modest projected GDP per capita growth, reflecting its relatively high initial average income levels, but one of the fastest projected population growth rates up to 2050 according to the UN.

− At the bottom of the emerging market growth rankings are Russia and Poland. This reflects their much less favorable demographics with UN projections indicating declining, rapidly ageing populations in both countries over the period to 2050.

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The ‘‘Market First’’ Scenario

- It is the high-growth, high-globalization, world peace scenario that is similar to many other optimistic projections that are often used as a starting point for discussing global futures. These assumptions produce another golden age of growth, with world growth and growth in most regions higher than in the last 20 or 50 years.

- Projected productivity gains include assumptions about both the creation and introduction of new technology into the production process, and the adoption of previously developed technology by the less-developed countries. There is clearly much scope for the latter leading to the possibility of enhanced growth rates, but there is also no scientific way of forecasting how much convergence will be achieved nor what growth enhancing or growth-retarding polices will be followed in each country.

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Sources: 2006–50 from IFs, Market First scenario, model version 5.21, and by assumption. Historical data fromMaddison (2003) with extensions by author.

Economic Growth in the Market First and Trend Scenarios compared to Historical Growth Rates

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The Trend Growth Scenario

- In the Trend Growth scenario per capita growth rates in the non-OECD countries as a whole are less than a half percentage point per year below than in the Market First scenario, but the growth assumptions are cut drastically in the countries where most of the poverty is—sub-Saharan Africa, North Africa, and a few Asian states. The Market First scenario assumes very large increases in economic growth in these countries, compared to the recent past.

- In some regions the trend-growth assumptions do not do much to raise poverty because there is not much extreme poverty to begin with in the region or because the trend rates of economic growth are high Sub-Saharan Africa, which was helped in the Market First scenario by some extremely favorable assumptions about policy changes—if not regime changes—is seriously hurt. By 2050, the extreme poverty rate rises to over 1 billion people.

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Poverty Headcounts and Poverty Ratios in the Troubled Regions

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The Best Way to Promote Long-Run Economic Growth

- Free markets and private property are better at generating growth than

centralized government control of production, but a strong government role

is nonetheless essential to enforce the rules of peaceful economic behavior

and alleviate inevitable market failures.

- Trade and financial market liberalization is needed to spur competition and

the flow of investment funds, including increased access to developed-

country goods and capital markets.

- Democratic accountability of government is helpful, to keep both corruption

and predation from destroying incentives to work, save, and invest, and to

encourage growth spending on education, health, and infrastructure.

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Dreaming with BRICs: the Path to 2050

− Over the next 50 years, Brazil, Russia, India and China-the BRICs economies-could become a much larger force in the world economy. We map out GDP growth, income per capita and currency movements in the BRICs economies until 2050.

− The results are startling. If things go right, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025 they could account for over half the size of the G6. of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050.

− The list of the world’s ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), making strategic choices for firms more complex.

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Overtaking the G6: When BRICs’ US$GDP Would Exceed G6

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GDP(2003 US$bn)

BRICs Have a Larger GDP than the G6In Less Than 40 Years

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BRICs Share of World GDP

GDP(2003 US$bn)

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The Largest Economies in 2050

GDP(2003 US$bn)

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Economic Growth

− India has the potential to show the fastest growth over the next 30 and 50 years. Growth could be higher than 5% over the next 30 years and close to 5% as late as 2050 if development proceeds successfully.

− Overall, growth for the BRICs is likely to slow significantly over this time frame. By 2050, only India on our projections would be recording growth rates significantly above 3%.

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China Overtakes the G3; India is Close Behind

GDP(2003 US$bn)

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India Shows Most Rapid Growth Potentialof the BRICs

GDP(2003 US$yoy)

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Incomes and Demographics

− Despite much faster growth, individuals in the BRICs are still likely to be poorer on average than individuals in the G6 economies by 2050. Russia is the exception, essentially catching up with the poorer of the G6 in terms of income per capita by 2050. China’s per capita income could be similar to where the developed economies are now. By 2030, China’s income per capita could be roughly what Korea’s is today. In the US, income per capita by 2050 could reach roughly $80,000.

− Demographics play an important role in the way the world will change. Even with the BRICs, demographic impacts vary greatly. The decline in working-age population is generally projected to take place later than in the developed economies, but will be steeper in Russia and China than India and Brazil.

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Global Demand Patterns

− As early as 2009, the annual increase in US dollar spending from the BRICs could be greater than that from the G6 and more than twice as much in dollar terms as it is now. By 2025 the annual increase in US dollar spending from the BRICs could be twice that of the G6, and four times higher by 2050.

Currency Movements

− Rising exchange rates could contribute a significant amount to the rise in US dollar GDP in the BRICs. About 1/3 of the increase in US dollar GDP from the BRICs over the period may come from rising currencies, with the other 2/3 from faster growth.

− The BRICs’ real exchange rates could appreciate by up to 300% over the next 50 years (an average of 2.5% a year). China’s currency could double in value in ten year’s time if growth

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Incremental Demand From the BRICs Could Eventually Be Quadruple G6 Demand

GDP(2003 US$bn)

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Global Poverty in 2050

- Population growth creates need; income growth creates effective demand. Taken together, world food demand could double by 2050.

- How many hundreds of millions of presently low income people are lifted out of their poverty will be the most important determinant of the future size of global food and agricultural product consumption.

- This will depend heavily on

– how “pro-poor” a development strategy each LDC follows, including the majority of the poor who live in rural areas

– how open high income countries are to import goods in which LDCs have a comparative advantage

– how positive an investment climate an LDC maintains – for both local and international investors

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Poverty Headcount at ‘‘$1’’ a Day (millions of people and percent)

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Long-Run Development Goals

- Poverty reduction – 70% rural

- Agricultural development is necessary, but not sufficient.

- Allow each country’s agricultural sector to contribute as much as possible to national development as consistent with economic efficiency and environmental sustainability

– Food supply– National Economic Growth (GDP)– Foreign exchange earnings– Employment

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Projected Average Real GDP Growth: 2007-50

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E7 Economies Could Grow to Significant Size by 2050

- Brazil could be bigger than Japan and Russia and Mexico could be bigger

than Germany or the UK.

- India has strengths in: IT skills and technologies, low cost English speaking

staff for offshoring services.

- China has advantages in: low cost manufacturing, higher average education

level, higher savings and inestment.

- Average GDP per capita in E7 could by 2050 reach current G7 levels

(but still well below projected G7 levels in 2050)

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China and India Dominate E7 Economies (Relative GDP at MERs)

Index: US= 100

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Private Sector Could Help

- Foreign direct investment and technology transfer to LDCs

- Raise internal food safety standards in LDCs

- Create marketing opportunities for LDC small-holders

- Be advocates in OECD countries for food and agricultural trade liberalization

- Be advocates for LDC development strategies that lift the maximum number of people out of poverty

- Advocate public investment in enabling environment in LDCs, including from ODA and World Bank

- Stop implicitly affirming the anti-trade, anti-business, anti-growth and anti-science agendas of transnational NGOs which purport to speak for LDCs and the poor.

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Reference

Hawksworth, J. et als. 2008. The World in 2050: Does the global financial crisis change the long-term outlook?.

Hawksworth, J. and Cookson, G.. 2008. The World in 2050: Beyond the BRICs: a broader look at emerging market growth prospects.

Hillebrand, E. 2007. The global Distribution of Income in 2050.

Wilson, D. 2003. Dreaming with BRICs: The Path to 2050.

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