October 09, 2003

Wheel of Fortune

The Economist covers a Goldman-Sachs long-run forecast of the rise of China and India (Brazil and Russia are, I think, red herrings: their economies will probably be about the size of Britain's and Germany's in fifty years, if they (and we) are lucky). China and India, whose year 2050 populations are likely to be three times that of the United States and whose PPP-adjusted real income levels are likely to be... ah, there's the question. I would bet that China is likely to have a real income level equal to half and that India is likely to have a real income level equal to a third that of the United States in fifty years, but both those are means of distributions that have long and large lower tails. Political--and economic--catastrophe in both is a real live possibility.

Economist.com | Global economic rankings A new study by Goldman Sachs focuses on the so-called BRICs (Brazil, Russia, India and China). Today their combined GDP (at market exchange rates) is one-eighth of the output of the G6 (Goldman leaves out Canada, which accounts for only 3% of the G7's GDP) But the study concludes that the total output of the four economies will overtake that of the G6 in less than 40 years. Of today's G6, only America and Japan would then still be among the world's six biggest economies.

Posted by DeLong at October 9, 2003 03:21 PM | TrackBack

Comments

It would be very interesting to hear more of your thoughts about the Russian economy.

On the finance side, Moody's raised the country's credit rating by two degrees this week to Baa3, which has caused quite a stir in Russian financial circles -- especially in light of the upcoming parliamentary and presidential elections. Not all agree with the move made by Moody's, and there appears to be another wave of bears versus bulls debates underway -- of course this is "finance" not necessarily "economics."

Although there have been some responsible financial decisions made by the Russian government since the financial debacle of August '98, there have also been high oil/energy prices, a mini-surge in domestic industry production (in large part credited to the devaluation of the ruble following August '98) which may now have run its course, etc. and may not reflect real, significant structural change.

It seems to me that a moderate "cautious optimism" is the most rational view, but as your "red herring" comment may imply, Russia has *major* structural problems to overcome, from legislative and infrastructure barriers to the growth of small and medium-sized enterprises (which remain a frustratingly low percentage of overall GDP numbers) to other "logjams" such as a state that is seemingly unable to protect many, if not most, of those who attempt to operate their business according to international best practices and refuse bribes to government officials or to the all too prevalent "krysha" or "roof" payments made to those who tag on an "unoffical" tax on top of the government-sanctioned taxes.

Russia again ranked far too poorly on the recently published corruption report by Transparency International (Finland, as is often the case ranked best at number 1 and Russia came in at 88th out of 133 -- the same general ranking they've had over the past two years, give or take a little). Not to mention continuing problems with press freedom, etc.

Again, some good things happening (and those who used to say it was going to be easy shouldn't have -- circa early 1990s), but the reality is probably best captured by the phrase "cautious optimistic."

Ryan Kreider

Posted by: Ryan Kreider on October 9, 2003 04:50 PM

In optimistic moments, I think Russia (flat rate tax, etc) could mover really fast, mostly educated, reasonably hard working folk. And the oil can help.
But the oil causes so much rent-seeking, it's prolly impossible for them to lose their corruption (until a non-oil based transportion system is widely used). With them remaining corrupt, they'll remain backward. Really a definite "choice" of the Russian power-elites.

I think India could boom, surprisingly, too -- but Muslim-Hindu problems; and corruption, too. I want to disagree (too low) on China & India, but can't, quite.

Posted by: Tom on October 9, 2003 05:30 PM

Just to clarify, do you mean that China and India in 50 years will have half and a third (respectively) of the per-capita income of the United States in 50 years, or that China and India in 50 years will have half and a third of the per-capita income of the United States today?

Posted by: Julian Elson on October 9, 2003 05:40 PM

please excuse my ignorance... but, i'm curious.

50 years seems like a long time... wouldn't global warming and conversion from cheap oil be expected to impact these GDP forcasts? how are such issues handled in the models?

Posted by: selise on October 9, 2003 05:54 PM

"China and India, whose year 2050 populations are likely to be three times that of the United States [...]"

I had no idea we were forecasting the US population to grow this fast... and/or the Cino-Indian continent's population growth to slow down so drastically. Or what am I getting wrong?

Posted by: Jean-Philippe Stijns on October 9, 2003 06:04 PM

Yeah the 3x population seems to imply something. India is already over 3.5x and is growing 1.5% a year compared with the approx 1% of the US.

I'm not even close to being an expert on India, but I have trouble imagining good things will happen in a place that already has about 10x the population density of the US and is growing at a rate that will add the equivalent of another United States into a space 1/3 the size in less than 20 years. I don't know enough about the cultures of India to know what will reduce the population growth or enough about agriculture to figure out what they will eat.


Posted by: snsterling on October 9, 2003 06:39 PM

It should be noted that that South Korea is more densely populated than India, and seems to be doing alright for itself. Than again, unless I'm mistaken, South Korea happens to consist almost entirely of good land, while India has large segments of desert (correct me if I'm wrong). I'm not mentioning the densities city-states like Singapore, Hong Kong, etc, because a "whole country" like India isn't really comparable to such a city-state, whereas South Korea is "whole country," as far as I know.

Also, I'm not sure what fraction of Indians are vegetarians, or what fraction will be in 50 years, but direct consumption of vegetables is less land-intensive than meat consumption. Given that India seems to be turning away from its secular, social-democratic, Congress-oriented past and becoming more religious (with a Hindu orientation), I wonder if Hindu Indians will be likely to become/remain vegetarians out of religiosity in spite of the increased affordability of meat.

Posted by: Julian Elson on October 9, 2003 09:14 PM

Also, regarding the rapid growth of the U.S. population...

http://economist.com/displaystory.cfm?story_id=1291056

I'm not sure whether y'all have seen it before, but it's an interesting article.

Posted by: Julian Elson on October 9, 2003 09:18 PM

Julian, thank you for posting the link.

I find the total dependency graph really interesting. In the long run more kids will mean more workers, but for quite a while it keeps the total dependency rate of the US rising just as bad as it will be in Europe.

I'm not sure why they use 15 as the age of non-dependency. I don't know what kind of production they expect at that age. It should be 18 at the least, although real production does not come until at least some experience or education beyond high school, so it might be more interesting to see the graph run at higher ages or weighted by age specific productivity. Also, early retirement is more likely among those who earned the most money, so that would also impact the true level of dependency. (yeah some won't be able to retire, but which workers will these be and what kind of output can you expect from them)

That's a really scary chart to look at though. For the US the % of working age population goes from 51% now to 36% in only about 25 years. For Europe those charts seem to indicate a halving of total workers by 2040. Eek. Not my idea of a good area for long term investment.

Posted by: snsterling on October 9, 2003 11:33 PM

snsterling writes:
"I'm not even close to being an expert on India, but I have trouble imagining good things will happen in a place that already has about 10x the population density of the US and is growing at a rate that will add the equivalent of another United States into a space 1/3 the size in less than 20 years. I don't know enough about the cultures of India to know what will reduce the population growth or enough about agriculture to figure out what they will eat."

The malthusian story that population growth will cause famines and economic disaster is well...wrong. I don't see any problem with the population growth rates in India. Right now they'r responding to incentives. In the future, a growing economy will lower those growth rates, and increased productivity will take care of the food-"dilemma".

The "cash for condoms"-solution to the developing world is wrong and above that, insulting to individuals in India, Africa e t c

Posted by: Svensson on October 10, 2003 01:46 AM

I'm far less of an optimist than Brad about India. I doubt they could become a modern economy unless they first do away with the caste system. Look at the turmoil of Nepal right now, and this could be the way of India tomorrow if there is not a peaceful evolution toward ending the current social order. Clearly, a modern economy needs a society that has some sort of egalitarianism, not of results, obviously, but of opportunity, that is not compatible with unequal quasifeudal structures (almost the same case goes for Brazil). In China, ironically, the communists, for all of their brutality, were succesful in ending the old antiquated feudal order, and by the time reforms started in 1978 there was in chinese society more or less of a level playing field that gave way to the high robust growth of the last 25 years.

Posted by: Andres on October 10, 2003 08:04 AM

Sure, Brazil has a serious problem with distribution of wealth, but to put it almost on par with India's caste system or quasifeudal structures is way overboard. The problem here as far as opportunities go is with education, and there were some significant advances on that in the last decade or so. What we need now is economic growth (and more jobs), the last 15 years of growth were pathetic.

Posted by: Alves on October 10, 2003 11:29 AM

As an Indian, I am costantly surprised by the over-importance attached to caste system in any analysis of India. In fact, the prevalence of the caste system correlates almost directly with economic growth and/or the lack of it. So, the chances of your seeing the caste system at work (in a way that hurts economically) in Bombay is infintely less than in Uttar Pradesh. Similarly the prevalence of the caste system is less pronounced (once again, in a way that hurts the economy) in the more economically developed areas of the South and West than in the North and East.

So, yes caste and religion are problems, but in my opinion are problems directly connected to the lask of economic development. By extension, I think economic development will take care of a lot of the caste and religious problems in India. At least, thats my experience from having lived in India for 25 years. And if anything, the post-liberalization record of India (1991-2003) seems to suggest to me that the GS study is a bit on the conservative side.

PS: I agree with Brad about Russia. Given the demographics, I dont know what Russia is doing in that list.

Posted by: Reuben on October 10, 2003 01:24 PM

Fifty years is a long time. Hong Kong is testament to the potent combination of Chinese entrepreneurship and British rule-of-law. Even if China's democratization is 10 years off, there's no doubt China will one day rival the U.S. in economic power.

Posted by: Peculiar American on October 10, 2003 05:05 PM

snsterling writes:
"That's a really scary chart to look at though. For the US the % of working age population goes from 51% now to 36% in only about 25 years. For Europe those charts seem to indicate a halving of total workers by 2040. Eek. Not my idea of a good area for long term investment"

Learn how to read a chart. The top half of the chart is of ratios, the bottom half is of percentage of the whole. So you end up overstating the problem by double.

After fixing the numbers for the real age one enters the workforce, the US will lose 13% or so of working age population by 2025 (or 1/2% GDP drag per year if everything else remained the same which it won't) and Europe will lose maybe 25% or so of total workers by 2040-2050.

Posted by: snsterling on October 10, 2003 05:16 PM
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