Some of the risks to the projections relate to economic assumptions. In particular, there could be, for example, diminishing returns to capital investment in emerging economies such as China, as has occurred in the past for Japan: this is already factored into the model to some degree, but could prove to be a more significant effect than we assume, particularly if methods of allocating capital are not improved in emerging economies like China and India, where state banks continue to play a dominant role.
Beyond the top 3 countries
Projections for the largest 20 economies in 2011, 2030 and 2050 have been measured by GDP at PPPs. Selected countries are highlighted in bold in a table to make the evolution of their GDP rankings over time clearer.
As well as the rise in China and India already noted, another notable development projected by our model is that Mexico and Indonesia could rise to be amongst the top 10 largest economies – ranking 7th and 8th respectively by 2050 in terms of GDP at PPPs. Russia could overtake Germany well before 2030 to become the largest European economy, but in the global rankings might then be overtaken itself by Brazil before 2050. Nigeria and Vietnam are projected to move into the top 20 by 2050 at 13th and 19th place respectively. Malaysia remains just outside the top 20 given its relative small population compared to the other emerging economies considered here, but nonetheless has strong growth potential. The UK is expected drop from 9th to 11th place by 2050 given that it is a relatively mature and advanced economy, although it holds its place relatively well against other advanced economies, in part due to relatively favourable demographics by EU standards. By contrast, less favourable demographics holds back Polish growth after 2030, although it should continue to grow relatively strongly for at least the next two decades.
Relative GDP growth
A Chart shows the annual average real GDP growth rates measured in PPPs6 for each country for the period from 2011 to 2050, and the contribution to this from average growth in GDP per capita (which can be interpreted as growth in labour productivity) and the average population growth rate over this period.
The Chart shows that:
- Emerging economies are set to grow much faster than those of the G7 and other current advanced economies for the next four decades.
- Nigeria could be the fastest growing country in our sample due to its youthful and growing working population, but this does rely on using its oil wealth to develop a broader based economy with better infrastructure and institutions (e.g. as regards rule of law and political governance) and hence support long term productivity growth – the potential is there, but it remains to be realised in practice.
- Vietnam is also a potential fast growing economy, although it needs a stronger macroeconomic policy framework to sustain rapid growth in the longer term.
- India, Indonesia and Malaysia also have strong growth potential in the Asian region, both due to their own momentum and the pull from the large Chinese economy.
- As noted above, China’s growth rate is expected to cool down after 2020 as its economy matures. Increases in labour productivity will be the main driver of its growth beyond 2020, as the age structure of China’s population becomes increasingly less youthful (accentuated by its one child policy for the past 30 years). However, Chinese growth should remain around 3-4 per cent per annum even in the 2040s, still some way above projected US or EU levels.
- Many of the current advanced economies will experience extremely low population growth – indeed Japan and Germany will actually experience negative population growth on average during the period to 2050 (this is also true of Russia and Poland).
Relative income levels
A Chart shows projected GDP per capita in PPP terms for the G7 and E7 economies. Although the E7 countries are set to overtake the G7 countries in terms of their overall size and rates of growth, they are still expected to trail significantly behind the G7 countries in 2050 in terms of GDP per capita. The US is projected to retain its top spot in this group on average income levels in 2050, whilst large emerging countries such as China, Brazil, Indonesia and India still sit at the bottom of the income table. However, the GDP per capita differentials between the two groups of countries are projected to close significantly (e.g. China’s GDP per capita as a proportion of US levels is expected to increase from 18 per cent in 2011 to 44 per cent in 2050). The UK is ranked fourth within the G7 countries in terms of projected GDP per capita in 2050, behind the US and, to a much lesser degree, also Canada and France, but still quite highly placed on this measure in global terms.
This analysis makes clear why Western companies should not abandon their home markets in the US and EU, even if these are growing much more slowly on average than the emerging economies. For higher valued products and services, the US and EU markets will still remain attractive locations given their more affluent consumers, although emerging market multinationals can expect to achieve an increasingly strong position in these markets over time as they move up the
Commentary on long-term growth projections for Malaysia
The Malaysian economy grew at a steady pace of 5.1 per cent in 2011. Growth was driven by expansion in domestic demand, attributed mainly to household spending and business investment. The 10th Malaysia Plan, which guides the medium-term development of Malaysia from 2011 t0 2015, has targeted annual real GDP growth of 6 per cent for the five-year period. Similarly, the Malaysian Government has embarked on an Economic Transformation Programme (ETP) which targets annual real GDP growth of 6 per cent to 2020.
Accordingly, we discuss in this short commentary why we believe that, if government plans can be delivered, Malaysia’s growth rate has the potential to outperform the model results, which show 5 per cent average real GDP growth up to 2020 (which is similar to the latest IMF medium term projection to 2017) and around 4.4 per cent real growth for the whole period to 2050. The Malaysian government has embarked on a major drive consisting of capacity building as well as structural transformation initiatives based on the New Economic Model (NEM). The NEM lays out an overall framework to transform Malaysia from an upper middle income to a high income and fully developed nation by 2020.
In 2010, the Malaysian Government launched two complementary transformation programmes: the ETP and the Government Transformation Programme (GTP). The ETP consists of two parts – the first part is the identification by private and public sector participants of 12 National Key Economic Areas (NKEAs)7, which are sectors with significant growth opportunities where Malaysia can compete globally. Entry Point Projects (EPPs) have been identified within these 12 NKEAs to spur growth and act as catalysts for investment and growth. This represents the demand side of the ETP. At the same time, 7 Strategic Reform Initiatives8 (SRI) have been introduced to complement the demand side measures by increasing the competitiveness and growth potential of the Malaysian economy.
Beyond 2020, a good case could be made for continued Malaysian outperformance of the model
projections based on three key factors:
- Malaysia is reaching out to global talent and its own large diaspora through active talent attraction programmes and a commitment to increasing the vibrancy and livability of its key urban areas.
- The expectation is that a strongly growth-friendly policy environment will continue well beyond 2020.
- Moving up the value chain, including developing the capacity to innovate, could drive continued strong labour productivity growth in excess of the 3.4 per cent rate projected by the model in 2021-50.
These transformational efforts are showing some early fruits of success – in recent global economic surveys and studies, Malaysia has consistently shown rapid improvement:
- The World Bank’s 2013 Doing Business report showed Malaysia improving to 12th position out of 185 economies, with key highlights including strong investor protection.
- The World Economic Forum’s Global Competitiveness Report 2012-13 ranks Malaysia in the top 10 Asia-Pacific countries and includes a reclassification of Malaysia from an efficiency-driven economy to one transitioning towards an innovation-driven economy.
Potential obstacles to sustainable growth
The growth projections outlined above assume no major global catastrophes and that countries continue to follow broadly growth-friendly policies. Clearly, however, there are many uncertainties surrounding such long term projections and many challenges that need to be overcome to achieve sustainable global growth at the 3 per cent+ average trend rates indicated by our model.
Some of the risks to the projections relate to economic assumptions in the model. In particular, there could be:
- Diminishing returns to capital investment in emerging economies such as China, as has occurred in the past for Japan: this is already factored into the model to some degree, but could prove to be a more significant effect than we assume, particularly if methods of allocating capital are not improved in emerging economies like China and India, where state banks continue to play a dominant role.
- A slowdown in the rate of progress at the technological frontier, as represented by the US in the model: this has been argued to be a risk by Gordon (2012), although it seems rather at odds with the accelerating pace of change in ICT and the potential for further rapid progress in areas like nanotechnology and biotechnology over the coming decades. It is possible that measured GDP growth could slow down due to difficulties in measuring technology-related improvements in the quality of some services, but we have not considered this in our model since it would not represent a slowdown in the underlying economic output variable that GDP seeks, however imperfectly, to measure.
- Greater protectionism leading to slower catch-up rates for emerging economies in particular. This is always a concern, but so far recent trends suggest that politicians recognise that moving too far in that direction would be self-defeating in the long run, as economies that cut themselves off from global trade and investment tend to grow more slowly in the long run. Another key challenge, however, relates to potential natural resource constraints on sustainable long-term global growth.
Source : The BRICs and beyond: prospects, challenges and opportunities : Report by Pricewaterhouse Cooper.