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Comparative Regional Economy <Lecture Note 8> 2013.12.12. CRE: World Regions by 2050 * Some parts of this lecture note are borrowed from some references for teaching purpose only. Professor Yoo Soo Hong Thursday: 9-12 a.m. Office Hour: By Appointment E-mail: yshong123@gmail.com
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Comparative Regional Economy <Lecture Note 8> 2013.12.12 CRE: World Regions by 2050 * Some parts of this lecture note are borrowed from some references for teaching purpose only. Professor Yoo Soo Hong Thursday: 9-12 a.m. Office Hour: By Appointment E-mail: yshong123@gmail.com M.P. 010-4001-8060 Home Page: ://yoosoohong.weebly.com
Global Outlook Source: Economic Intelligence Unit, March 2012
Changes in Global Economic Risks - 2.4% Greater Russia region - 0.9% - 1.2% North American region Europe region 0.8% Middle East region 1.8% 1.2% 0.9% African region Latin America & the Caribbean region Production (Mn tonnes) Consumption (Mn tonnes) Compounded annual growth rate consumption Asia pacific region Legend Source: Energy Policy Scenarios to 2050, World Energy Council (values in mn tonnes)
Global Outlook United States Europe Japan • The economy grew by 1.7% in 2011, but grew by 2.8% in Q4 of 2011. • The inflation rate for 2011 doubled to 3.2% from 1.6% in 2010. • Growth prospects for Q1 2012 are around 2 to 2.2% on the back of a gain in consumer confidence’s subsequent retail sales and manufacturing. • Persistently high unemployment and risks of downturns in markets abroad will keep the FED’s policy rate at very low levels until even as late as 2014. • European economic growth slowed during 2011 to 1.5% and is expected to contract further in 2012 to -0.3%, before a modest recovery in 2013. • Inflation should remain relatively low and contract to around 2.2% in 2012 from the 2.7% observed in 2011. • The European debt crises threatened to derail global recovery for the last two years • Manufacturing in Japan is already experiencing a v-shaped recovery after the March 2011 earthquake and tsunami. • GDP is expected to grow at around 1.5% in 2012 on the back of reconstruction activities and a recent upswing in machinery exports and local consumption.
BRICS The Next 11 Emerging Markets • Fears surrounding an economic downturn have lead EM central banks to either cut their interest rates or postpone monetary tightening during 2011. • Market expectations are that EM countries will outperform developed countries between 2013 - 2016, as interest rate differentials will favour investment into these EM countries over that of the OECD economies. • The BRIC countries are recognised as having very large economies and populations, with unravelled growth potential in foreseeable years. • The Brazilian economy experienced rapid expansion in the last decade with strong economic growth • Russia experienced strong economic growth over the past few years, but manufacturing and foreign investment slowed down since the global downturn. • The Next 11 consist of South Korea, Iran, Mexico, Turkey, Philippines, Indonesia, Egypt, Nigeria, Pakistan, Vietnam and Bangladesh. • These economies are smaller in size than the BRIC countries, but with its large population size and growth rates of above the global average, promises favourable opportunities for future investment and market growth.
Key Drivers of Long-term GDPGrowth • 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)
Projected Real Growth in GDP and Income Per Capita 2007-50 (% pa)
Projected Real Growth Rates of Emerging Economies: 2007-50 (% pa)
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.
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.
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.
Economic Growth in the Market First and Trend Scenarios Compared to Historical Growth Rates Sources: 2006–50 from IFs, Market First scenario, model version 5.21, and by assumption. Historical data from Maddison (2003) with extensions by author.
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.
Poverty Headcounts and Poverty Ratios in Developing Regions
Developing World and Economic Growth Catch-up Selected developed and developing countries, 2005 and 2050, projected GDP per capita in PPP terms . Source: Price Waterhouse Coopers 2013 figure 8. http://www.pwc.com/gx/en/world-2050/pdf/world2050emergingeconomies.pdf
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.
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.
Overtaking the G6: When BRICs’ US$GDP Would Exceed G6
BRICs Have a Larger GDP than the G6 In Less Than 40 Years GDP (2003 US$bn)
BRICs Share of World GDP GDP (2003 US$bn)
The Largest Economies in 2050 GDP (2003 US$bn)
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%.
China Overtakes the G3; India is Close Behind GDP (2003 US$bn)
India Shows Most Rapid Growth Potential of the BRICs GDP (2003 US$yoy)
Biggest Population, biggest consumer of resources, biggest economic surplus and reserves . GDP one-sixth of US, 90th in world p.c. Demography Population ageing problem, solution not in sight. No ‘rescue’ from migration. ‘Lewis point’ exaggerated. Population homogeneous, minorities small. Environment Worst global environment. Biggest greenhouse contributor. Unsafe water, air, food, medicine. Water shortage in North. Climate change threats: 150 million people in LECZ. Politics Rigid party control ; Corruption and local oppression, inequality, environment, eventual political instability? Isolated internationally, influence through money, Huge economic, social growth 2002 –11: Projected urban growth 380 million – 600 million 2030, energy demand 3x by 2030.. 80% of India unbuilt. Demography Population growth problem. No ageing problem yet. Uneven regional transition. Environment Nearly worst global environment 125th / 132 in 2012 GEP Index Water insecurity, 4% of world’s fresh water with 17% of population Resource consumption unsustainable. Climate change threat: (hotter, wetter). Politics Plus: judiciary, press, democracy, civil society, unity despite diversity Minus – corruption at all levels, clientism, subsidised prices, heavy bureaucracy. ‘Permit Raj’ lives; high and growing inequality Will China rule the world? Will India be the next superpower?
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 $80,000. • Demographics play an important role in the way the world will change. Even with the BRICs, demographic impacts vary greatly. The decline in working-age population is generally projected to take place later than in the developed economies, but will be steeper in Russia and China than India and Brazil.
Global Demand Patterns • As early as 2009, the annual increase in US dollar spending from the BRICs could be greater than that from the G6 and more than twice as much in dollar terms as it is now. By 2025 the annual increase in US dollar spending from the BRICs could be twice that of the G6, and four times higher by 2050. • Currency Movements • Rising exchange rates could contribute a significant amount to the rise in US dollar GDP in the BRICs. About 1/3 of the increase in US dollar GDP from the BRICs over the period may come from rising currencies, with the other 2/3 from faster growth. • The BRICs’ real exchange rates could appreciate by up to 300% over the next 50 years (an average of 2.5% a year). China’s currency could double in value in ten year’s time if growth
Incremental Demand From the BRICs GDP (2003 US$bn)
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
Poverty Headcount at ‘‘$1’’ a Day (millions of people and percent)
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
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)
China and India Dominate E7 Economies (Relative GDP at MERs) Index: US= 100
Private Sector Could Help to Reduce Poverty - 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.
World Population Outlook 1950-2050 • Total population for 2050 will reach 9.078 billion • Population for 2003 was expected to be 6.302 billion • In spite of higher population for the future, the growth rate of the population is expected to fall due to the decline in fertility rate and the toll taken by the HIV/AIDS pandemic in some countries. Also due to the ethnic cleaning and treats as SARS. • Fertility rate decline – family planning • Increase in population but decrease in average annual growth rate. e.g. 1.16% in 2003 but 0.43% in 2050
Population Growth at a Slower Pace 12.0 0.9 0.8 0.7 9.0 0.6 0.5 Annual increments (billions) 6.0 Total population (billions) 0.4 0.3 3.0 0.2 0.1 0.0 0 1750 1800 1850 1900 1950 2000 2050 Source: UN, World Population Assessment 2006
Population by Region1950-2050 • World population growth will be concentrated in developing countries for the foreseeable future • Population for Asia, Africa, Sub Saharan Africa, Middle East, North America and South America will increase substantially • Population for European countries and Former Soviet Union tends to fall for the foreseeable future • Not much different for the population for Oceania and Baltic region
Expert Views of Low Fertility for China, 1990 - 2050 Estimated and projected period TFR in China through 2050: Expert-based projection (main estimate and 80% confidence interval) as compared with three rounds of UN projections and estimates (From Basten et al. forthcoming)
