The World in 2050-Quantifying the shift in the global economy - HSBC

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EconomicsGlobal4 January 2011abcWhy do economies grow? The emerging markets are at a very early stage of development Global growth will now be powered by the emerging economiesWhat spurs growth?We are moving into a world where global growthwill be powered by emerging economies, ratherthan held back by them. The question is why somany of the emerging markets are now managingto ‘catch up’ having failed so miserably toimprove living standards through much of the 20 thcentury (Table 6).As we look into the future, we need to work out howmuch of this is due to improvements in thefoundations of economic growth, to establishwhether the recent growth spurt can be sustained.6. What is driving these growth spurtsAnnual average growth in GDP per capita 1913-50 1950-73 1973-98World 0.9 2.9 1.3United States 1.6 2.5 2.0Western Europe 0.8 4.1 1.8Japan 0.9 8.1 2.3Total Asia ex Japan 0.0 2.9 3.5China -0.6 2.9 5.4Hong Kong n/a 5.2 4.3Malaysia 1.5 2.2 4.2Singapore 1.5 4.4 5.5South Korea -0.4 5.8 6.0Taiwan 0.6 6.7 5.3Thailand -0.1 3.7 4.9India -0.2 1.4 2.9Indonesia -0.2 2.6 2.9Latin America 1.4 2.5 1.0Argentina 0.7 2.1 0.6Brazil 2.0 3.7 1.4Chile 1.0 1.3 2.6Colombia 1.5 2.1 1.7Mexico 0.9 3.2 1.3Peru 2.1 2.5 -0.3Uruguay 0.9 0.3 2.1Venezuela 5.3 1.6 -0.7Eastern Europe 0.9 3.8 0.4Former USSR 1.8 3.4 -1.8Africa 1.0 2.1 0.0Egypt -0.1 1.5 3.0South Africa 1.3 2.2 -0.3Morocco 1.6 0.7 1.9Ghana 1.1 1.0 -0.5Source: Maddison, The World Economy, OECD Development Centre Studies5
EconomicsGlobal4 January 2011abcTo get to projections for total GDP, we start bymodelling income per capita and then incorporatethe demographic outlook.Our estimations of per capita income are basedheavily on the work of Harvard’s Robert Barro 1 . Thekeys determinants of economic development aresplit into three groups (full details can be found inAppendix 1):1 Economic governance: the degree ofmonetary stability, political rights and thelevel of democracy, the rule of law, the sizeof government (with large governmentrestricting activity).2 Human capital: the level of education,health of the population and fertility rate.3 The starting level of income per capita.Before we go into these variables in more detail,it’s worth pointing out that we don’t includevariables such as savings or investment rates. Thereason is that these should be endogenous to thesystem. We are looking to identify the exogenous,structural factors that would mean people want toinvest. This should provide us with a morerigorous framework for considering howeconomies have changed and whether growth canbe sustained. In our view, this is a key reason whyour study differs from some previous studieswhich try to extrapolate how the inputs will grow,often using current investment rates. These willtend to overstate growth.Economic governanceThe first set of variables are rule of law, monetarystability, democracy and government interference,proxied by government spending. All try tocapture sound economic governance.This is clearly one area where there has beensignificant change in the past couple of decades andwhich plays a major role in the recent progressfrom a number of these emerging economies.Most obviously there have been some significantregime changes around the world. Communism inlarge swathes of the world, including the SovietUnion and Mao’s China, effectively divided theeconomic world and closed these systems off toboth trade and the technological progress in theWest. How can you ‘copy and paste’ thetechnologies of the world’s best economicperformers if you can’t see what they are doing?These command economies often failed toallocate their domestic resources efficiently,suffering from low productivity and a lack oftechnological advance.As a result, through the 1950s, ‘60s and early‘70s, given income per capita was coming fromsuch a low base, we should have seen income percapita growth far outstrip that of Western Europeor the US. Russia’s performance in the ‘50s and‘60s was reasonable but wasn’t sustained (Table6). Of course, the threat of war also played a keyrole in how resources were allocated. In the1970s, military and space spending consumed15% of GDP in the Soviet Union, three times thatin the US and five times that in Europe.These ‘iron curtains’ have now been drawn back,opening these economies up to trade, and thetechnology available in developed nations.1 Determinants of Economic Growth: A cross-countryempirical study, Robert J BarroIndia's relative underperformance over the sameperiod also stemmed from significant governmentcontrol and an inability to efficiently allocate6
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Page 46: Karen WardSenior Global EconomistHS

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