Emerging Economies to Surge, but Deliver Only Modest Wealth for MostPublished February 19, 2013 in Arabic Knowledge@Wharton
By now, there is consensus that today's developing countries will be tomorrow's most vibrant economies in the global market.
Investors have reacted quickly to forecasted demographic and economic trends that see developing countries such as China taking the lead in terms of economic activity in the world -- last year, 52% of the total $1.3 trillion in global foreign direct investment went to developing countries, according to the United Nations Conference on Trade and Development.
The Middle East economic outlook, though, is divided between countries with oil, and those without. For the region as a whole, the International Monetary Fund projects growth of 5.1% in 2012. But when grouped into oil exporters and non-oil exporters, the fortunes differ: 6.6% for the former, and just above 2% for the latter.
For most of the countries in the Middle East and North Africa (MENA) region, the IMF notes, the challenge is to "maintain macroeconomic stability under difficult internal and external conditions."
Other challenges loom ahead for developing countries before they can ascend to their expected positions in the future global economy. At the latest G-20 assembly in Moscow, leaders of developing countries expressed their fear of developed countries engaging in currency wars to slow their growth. Others claimed they were being unfairly accused of being corrupt, while the president of the World Bank warned against global warming and its potential to harm the world economy.
The advance of emerging economies, still, seems inevitable. The Organization for Economic Co-operation and Development (OECD) recently published a report stating that by 2060, "the balance of economic power is expected to shift dramatically over the next half century… the United States is expected to cede its place as the world's largest economy to China, as early as 2016. India's GDP is also expected to pass that of the United States over the long term."
Asa Johansson, senior economist and author of the report, notes there will be a "shift in the market power of economies. We see that the share of non-OECD countries will increase from one-thirds to two-thirds by 2060, while OECD countries will fall from two-thirds to one-thirds."
An edited transcript of the conversation follows.
Arabic Knowledge@Wharton: In a recent report, you conclude that by 2060, emerging economies, specifically China and India, will be bigger than G7 economies and bigger than the entire OECD membership. Why?
Asa Johansson: What we do in this report is we look at the drivers of economic growth. We focus on demographic factors, development in labor markets, technological progress, labor productivity and education. So these are the drivers of growth in our set-up. In going forward, both emerging and more developed economies, the main drivers of economic growth will be technological progress and education upscaling.
Our projections actually look at all the countries in our sample, which include 42 countries. We don't cover the entire world but we cover 90 percent of the global economies. In the OECD economies over the next 50 years, growth on average will be around 2%.
Emerging economies will grow faster than mature economies. The main reason they will grow faster is they will have better productivity and more upscaling than mature economies. They're starting off at an initial lower level of education so there's more room for upscale of labor force. That will, of course, add more to growth than countries with already high levels of education.
For example, the labor force in China is not as well educated as the labor force in the U.S. But going forward, we expect the labor force in China will gradually become better educated. A better-educated labor force will more likely participate in the labor market and help improve growth projections.
Another important factor is emerging economies will have faster productivity growth than more mature economies. Their biggest growth will be due to moving from less productive sectors to other areas. For example, emerging economies will move from agriculture-based to more manufacturing and high-tech sectors than mature economies.
Arabic Knowledge@Wharton: But this report can help governments plan for a more educated labor force and for expanding the future job market?
Johansson: We can have a good idea even based on the birth rates we have today and what they're going to look like in the future. You can see some countries are going to age faster than others. This will of course have implications for the availability of the labor force. Some countries may see they have to react more than others to an aging population due to a shrinking labor force.
Arabic Knowledge@Wharton: And as the labor force becomes more educated, will there be jobs to meet the demands of the workers? Job growth is a huge problem for the Middle East, and is cited as a cause for the Arab Spring.
Johansson: Yes, of course. That is definitely a very important factor. I should point out our sector is the supply sector, so we look at supply of labor and those sorts of demographics. Of course, if the potential resources for a higher-education labor force don't materialize, how can countries make use of the pool of educated resources they have? The demand side is also important. You can match the skills of the population with the actual jobs you have on hand. From our perspective, we can't take these types of things into account because it's quite a stylized sector. In the long run, there are always uncertainties about the projections we have.
Arabic Knowledge@Wharton: How will the scale of economies of emerging countries shift in the future?
Johansson: What happens in our forecast is that on average over the next 50 years in the OECD economies, we will see an average growth of 2% annually. But China and India and other emerging economies will grow faster. Initially China and India will grow relatively fast and become more alike to more mature economies. But eventually their economies will become more similar to OECD economies. Their growth rates will slow down over time. We don't forecast China and India to have the same type of growth we've seen in the past decade. Instead we'll see the growth slow down from over 7% that we've seen in the last decade to around 5% by 2020, and roughly half of that by 2050. So it's a gradual slowdown in the growth rate of emerging economies. But still initially much higher than what you have in the OECD economies.
Something that I've found quite interesting is that even though emerging economies will grow faster than mature economies and will continue to grow fast for the next few decades, there will still be differences in living standards. That is, when you look at GDP per capita, China and India will not become as rich as the U.S., even by 2060. So it's different concepts. Even though they're growing faster, they'll still have lower living standards than the U.S.
Arabic Knowledge@Wharton: Could you explain that further? Is that because people are living in rural areas and China and India are geographically such big countries?
Johansson: A simple explanation would be to say that GDP is based on the overall size of the economy. Even though China is such a huge economy in terms of population, we will have high GDP because they have a large pool of workers and they will grow fast and gain a larger share of the global economy. Once you start dividing that per person, the level per person is quite low anyway. We haven't looked in detail at how the Chinese economy will be restructured or not.
China will still grow fast but there will still be differences in living standards. Partly why there will still be differences in living standards is because there will still be gaps in the level of technology between China and Europe and the U.S. There will also be gaps in the level of education. They will improve in technology and education but they're not quite yet at the levels that you see in the U.S. and Europe.
Arabic Knowledge@Wharton: You mentioned that aging will be a drag on growth in Asia, Eastern and Southern Europe. What can countries do to help alleviate the affect of an aging population on GDP?
Johansson: One thing I noticed is people are postponing retirement in line with longevity. As population becomes healthier, we tend to live longer. There's also scope of having a longer active life. Certain countries have already postponed retirement age in line with longevity. That's one example. There are many other things but this is something both emerging and more mature economies can do.
What we see in our numbers is we expect China to have the largest growth rate initially up until around 2020 or 2030. Then China will be overtaken by India and Indonesia in growth rates. The reason is simply because China's population is aging much faster than India and Indonesia. This means the working population will be lower in China and then you have fewer opportunities to grow from employment. Aging has implications.
Arabic Knowledge@Wharton: Labor growth doesn't contribute strongly, except in a few countries including Israel, South Africa, Turkey, Saudi Arabia and India. Why is that?
Johansson: Most countries that we cover actually don't have favorable demographics because of aging. Aging is reducing the labor force. The exception is in some countries, including the ones that you've mentioned. With Saudi Arabia, you have to be a little careful because it's special. There's a larger uncertainty because it has a very large labor force of migrant workers from neighboring countries. Of course, there is always an uncertainty of how large that labor force of migrant workers will be, but we're assuming it's maintained at the current level. We don't know if this will always be the case.
Arabic Knowledge@Wharton: You had more interesting findings about Saudi Arabia. Can you tell us about Saudi Arabia's growth?
Johansson: It's quite a difficult country to make long-run projections, given that the larger share of Saudi's GDP is based on oil revenue. And oil revenues depend largely on the price of oil in the future. It's very difficult to predict.
Arabic Knowledge@Wharton: How is Turkey faring in the future as an economy?
Johansson: Turkey is one of those countries that will grow slightly above OECD average. Over the next 50 years, the rate will be around 2.9%. One contributing factor is aging is not occurring as fast as many other OECD countries. That will help maintain the labor force. We also project some improvements in education and the labor force will be more upscaled. The more the labor force becomes more upscaled, the more likely they will be trained and find jobs and that will help keep up employment and contribute to growth.
Arabic Knowledge@Wharton: South Africa is a key partner with the OECD as an emerging economy. What kind of role will South Africa play in the future global economy?
Johansson: South Africa is the only country in the African region we study. From what we see in our projections, we expect South Africa to grow faster than the average of the OECD economies over the next 50 years. Around 3% per year, which is higher than the 2% average of OECD economies. The reason why they'll do better than the average OECD economy is because they'll see faster productivity growth and faster upscaling in education. Right now, there's a lower level in the education force and low level of productivity. There's scope for them to catch up by implementing better technologies and restructuring their economy and improving education. So that's why South Africa tends to grow faster than the average OECD country.
There's another contributing factor that's important. The demographic structure in South Africa is more favorable than other OECD countries because they tend to have a younger population, which means they won't see the same type of problems with aging the other OECD countries will face over the next 50 years. They will have quite a large pool of working-age population they can draw from. But of course this depends on, as you said, how these countries make use of the large pool of available workers they have, drawing them into the labor market and the type of jobs they create.
So, our outlook for South Africa is on average better than a typical OECD country.
Arabic Knowledge@Wharton: Indonesia is not a country you hear a lot about in terms of a future influential economic power. Can you explain some more about the reasons for its economic growth?
Johansson: We do see the growth in the Indonesian economy will be quite good going forward. As I already pointed out, they have quite favorable demographics. They have a relatively young population that will help boost employment. They will also have gains in productivity as they are implementing newer technologies that advanced economies are having. They will also see the upscale of the labor force. These are the combined factors that see Indonesia growing fast in our setup.
One general finding in our forum is that we have a growth setup called conditional convergence. Basically, countries are going to expect to converge or grow to the overall level of their long-term potential. If you're very far away from your potential, then you have a scope for growing fast because there are lots of new technologies you can implement. You can upscale your labor force and you tend to grow faster than countries that have already implemented best practices in many of these areas. So that's one explanation you see in countries that are currently further behind in technologies and have lower levels of education. They tend to grow fast in our setup because they have scope for growing faster than other countries that have already implemented best practices and have higher levels of education.
Arabic Knowledge@Wharton: Why does GDP per capita in oil-rich countries like Norway and Saudi Arabia exclude the oil sector? Is it because oil prices fluctuate as you said?
Johansson: Yes, exactly. We're trying to exclude the oil money. Countries that depend highly on prices of oil are quite uncertain because we're not certain of oil prices.
Even though countries, like China, India and Indonesia are growing faster than the average OECD country, they still do not have the same level of GDP per capita in 2060.
For example, in 2011, India measured around 16% of the U.S.'s GDP per capita but by 2060, it's expected to measure something around 26%. [Now Saudi Arabia measures around 23% of the U.S.'s GDP per capita and will rise to around 35% of the U.S.'s GDP per capital in 2060.]
It's quite interesting to see that countries are growing fast when you look at living standards but there are gaps compared to the U.S.
Arabic Knowledge@Wharton: Is the U.S. considered the highest standard of living?
Johansson: No, it depends on what you gauge. You could use the benchmark of the average of OECD countries. Or the richest country today, which would be I think Luxembourg. We took the U.S. because there's been discussion about whether China will overtake the U.S. economy [in global GDP output]. There's no norm for which you should compare.
We have another visual display with three different pie charts. If you look at the share of pure GDPs, i.e. market shares of different countries, you can see China has 17% of global GDP in 2011 and its share will increase to 28% by 2060. The Euro area has 17% of the global GDP in 2011 and it will decrease to 9% by 2060. At the same time, the U.S. has a share of 23% in 2011 and it will decrease to 16% by 2060.
This is quite interesting because we see non-OECD countries roughly account for one-third of overall GDP. While in 2060, they will account for two-thirds instead of one-thirds.
This is what we mean when we say there is going to be a shift in the market power of economies. We see the share of non-OECD countries will increase from one-thirds to two-thirds by 2060 while OECD countries will fall from two-thirds to one-thirds.
Arabic Knowledge@Wharton: Isn't that quite worrying for OECD countries, especially considering the Eurozone crisis continues?
Johansson: I would have to say the outlook for overall OECD economies will grow on an average of 2% every year, which is not bad. So it's ticking on. It's just these emerging economies will grow faster and they also have a larger population. That means that those numbers will account for a larger share of global GDP.