The last wave of globalisation has been driven by technology and by the deliberate removal of man-made obstacles to cross-border movements of goods, services, capital, people, and ideas. It has been instrumental in spreading economic growth more widely than ever before (see for example Pinkovskiy and Sala-i-Martin 2010 on this site). But what will the next 40 years look like?
This column introduces a new Policy Insight (Buiter and Rahbari 2011) in which we investigate the likely future sources of global economic growth between 2010 and 2050. We identify who will be the global growth generators, i.e. 3Gs.
We don’t want 3G to join the list of patronising acronyms or even the list of cute but uninformative and pointless ones (BRIC, Next Eleven, Seven Percent Club), although at one point we flirted with an intriguing label like the Magnificent Seven, the Nine Nazgûl or The 39 Steps. Instead we view it as a question. What are the generators of global growth and profitable investment opportunities or the next 40 years? This question requires an answer based on economic fundamentals and a replicable methodology.
Forecasting the next 40 years of global growth
We base our forecasts on three sources of information.
- A set of individual country forecasts of GDP (real GDP using PPP exchange rates and dollar GDP using market exchange rates), per capita GDP, inflation, and market exchange rates for 58 countries accounting for 85% of global GDP prepared by the 50 economists on Citi’s Economics team.
- Historical GDP data for the most recent 10-year period.
- A few centuries of economic research on the drivers of long-term growth.
Our reading of the historiography and cliometrics of secular economic growth also prompted us to construct a 3G index that aggregates some key growth drivers identified in this literature (see Barro and Sala-i-Martin 2003 for a useful survey). These are:
- gross fixed domestic capital formation (as a share of GDP),
- gross domestic saving (as a share of GDP),
- a measure of human capital, itself aggregating demographic, health and educational achievement indices,
- a measure of institutional quality,
- a measure of trade openness, and
- the initial level of per capita income.
One key insight was the distinction between growth at the technology frontier and catch-up or convergence growth. We use the local knowledge embodied in our economists’ forecasts (including demographic projections), the historical per capita GDP growth rates for the most recent decade, and stylised facts of convergence (the US as the frontier technology country and the empirical regularity that historically the rate of convergence has been lower the smaller the productivity gap between the frontier nation and the converging nation) to put together our final published set of forecasts.
Our key projections – Who will be 3G?
We expect strong growth in the world economy until 2050 (see Figure 1), with real GDP growth at PPP exchange rates of 4.6% per annum until 2030 and 3.8% for the period 2030-2050. This would cause global real GDP at PPP exchange rates to rise from $73 trillion in 2010 to about $377 trillion in 2050.
Figure 1. World real GDP growth 2010-2050
Our 3G countries - there are 11 of them – comprise Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka, and Vietnam. They were selected on the basis of their average real per-capita GDP growth over the period 2010-2050 – 5% or higher at PPP exchange rates. There was a distinct discontinuity of more than 0.5% in projected per-capita growth rates between the 11 3G countries and the fastest-growing country not included in the 3G category, which was Thailand.
Of the 11 countries we identify as global growth generators, nine are in emerging Asia. This is probably not surprising, but our next finding, that the other two are African nations may well be something of a surprise. We believe that this may well turn out to be Africa’s century as well as Asia’s century.
China will overtake the US to become the largest economy in the world by 2020 (at PPP exchange rates; it would take a decade longer at market exchange rates) and will itself be overtaken by India by 2050.
There are several reasons why two of the BRICs, Brazil and Russia, are not in the 3G category. One is that they are significantly richer than the 3G countries. A lot of catch-up has already occurred and most of the low-hanging fruit is gone. The second reason is their low investment rates. The third is that, for the later stages of the convergence process, the quality of institutions and policies matters more than for the early stages. Brazil and especially Russia have material weaknesses in the quality of their key economic institutions and policies which limit their growth prospects.
Conclusion: There’s never been a better time for humanity
Projections and forecasts are smooth. Growth will not be smooth. Market economies and capitalism are characterised by alternating booms and busts, not by smooth growth. In addition, there will be occasional ‘growth disasters’, caused by very bad policies, internal or external conflicts or natural disasters. We know such growth disasters will occur, although we don’t know which country or countries they will affect. It must be recognised, therefore, that because of our inability to forecast local growth disasters, our global growth estimates are bound to be somewhat optimistic.
Even allowing for that, however, we believe that there was never a better time for humanity, as regards the satisfaction of material wants, than the first half of the 21st century is likely to be. There is no secret to how to achieve high growth rates. Some of the necessary conditions are, however, not choices – even collective choices – that nations or regions can make. Others represent the result of choices that ought not to be made.
Barro, Robert J and Xavier Sala-i-Martin (2003), Economic Growth, 2nd Edition, McGraw-Hill
Buiter, Willem H. and Ebrahim Rahbari (2011), Global Growth Generators; Moving beyond ‘Emerging Markets’ and ‘BRIC’, Citi Global Economics, 21 February 2011.
Buiter, Willem H and Ebrahim Rahbari (2011), "Global growth generators: Moving beyond emerging markets and BRICs," CEPR Policy Insight No 55, 21 April.
Pinkovsky, Maxim and Xavier Sala-i-Martin (2010), “African povery is falling…much faster than you think”, VoxEU.org, 6 December.