PricewaterhouseCoopers (PwC) has published an updated version of its earlier projections of the world economy and has ranked countries based on the size of their economy. The new update takes into account the economic shift that has occurred after the global financial crisis, which has further accelerated the shift in global economic power to the emerging economies. It compares between the seven fastest emerging economies (E7)-- China, India, Brazil, Russia, Indonesia, Mexico and Turkey-- and the G8 economies.
Measured by GDP in purchasing power parity (PPP) terms, which adjusts for price level differences across countries, the largest E7 emerging economies seem likely to be bigger than the current G7 economies by 2020, and China seems likely to have overtaken the US by that date. India could also overtake the US by 2050 on this PPP basis. GDP at PPPs is a better indicator of average living standards or volumes of outputs or inputs, because it corrects for price differences across countries at different levels of development.
|The World in 2050 -- GDP at PPPs Rankings|
|PPP 2009 Rank||Country||GDP at PPP(constant 2009 US$bn)||PPP 2050 Rank||Country||Projected GDP at PPP(constant 2009 US$bn)|
However, John Hawksworth and Anmol Tiwari, the authors of the report, also rank countries based on GDP at market exchange rates (MERs), which does not correct for price differences across economies but may be more relevant for practical business purposes. Ranking with MERs show that the E7 overtaking process is slower but equally inexorable. The Chinese economy would still be likely to be larger than that of the US before 2035 and the E7 would overtake the G7 before 2040. India would be clearly the third largest economy in the world by 2050, well ahead of Japan and not too far behind the US on this MER basis. In 2009, India’s share of world GDP at MERs was just 2%. By 2050, this share could grow to around 13%. MERs factor in the likely rise in real market exchange rates in emerging economies towards their PPP rates. This could occur either through relatively higher domestic price inflation in these emerging economies, or through nominal exchange rate appreciation, or (most likely) some combination of both of these effects.
|The World in 2050 -- GDP at MER Rankings|
|PPP 2009 Rank||Country||GDP at MER(constant 2009 US$bn)||PPP 2050 Rank||Country||Projected GDP at MER (constant 2009 US$bn)|
This well could be a return to the historical norm:
In many ways this renewed dominance of China and India, with their much larger populations, is a return to the historical norm prior to the Industrial Revolution of the late 18th and 19th centuries that caused a shift in global economic power to Western Europe and the US – this temporary shift in power is now going into reverse. This changing world order poses both challenges and opportunities for businesses in the current advanced economies. On the one hand, competition from emerging market multinationals will increase steadily over time and the latter will move up the value chain in manufacturing and some services (including financial services given the weakness of the Western banking system after the crisis).
The report notes that India’s trend growth is expected to overtake China’s trend growth at some point during the coming decade due to India having a significantly younger and faster growing working age population than China and due to it having more potential for growth as it is starting from a lower level of economic development than China and so has more catch-up potential. However, India will only fully realize this great potential if it continues to pursue the growth-friendly economic policies of the last two decades.The authors argue that particular priorities should be in maintaining a prudent fiscal policy stance, further extending its openness to foreign trade and investment, significantly increased investment in transport and energy infrastructure, and improved educational standards, particularly for women and those in rural areas of India.
The model’s assumption is that long-term trend growth is driven by the following four factors:
- Growth in the labor force of working age (latest UN population projections)
- Increase in human capita (average education levels across the adult population)
- Growth in the physical capital stock (capital investment net of depreciation)
- TFP growth (technological progress and catching up)
In terms of per capita income, the US will still lead the way.