Taking advantage of a changing world order
By Shahid Javed Burki
Monday 29, March 2010
EVEN though some experts suggest that the current international economic turmoil is caused by globalisation, the fact remains that the increasing exchanges among the world economies will continue to reshape them. Those countries that position themselves to take advantage of globalisation will benefit. Pakistan, unfortunately, is not one of them.
Those that remain internally focused will be left behind. Again, unfortunately Pakistan belongs to this category of nations. To appreciate what is happening to the global economy, we might draw upon the work done by Goldman Sachs about the future of the world economy. It was this institution that, some years ago, developed the notion of the BRICs – Brazil, Russia, India and China – as one of the emerging centres of global economy.
The accompanying charts provide estimates by Goldman Sachs of national incomes for the 22 largest economies in the world in the years 2025 and 2050. While such long-term forecasts seldom turn out to be correct, what is interesting about those produced by the bank are some of the suggested changes that may occur in the ordering of the economies around the globe. According to these estimates, Pakistan in 2025 will be the 20th largest economy in the world, slightly larger than Egypt and Bangladesh.
There is a fairly significant realignment of the economies in the next 15 years. By 2025, the world economy is likely to be dominated by United States and China, each with national incomes close to $20 trillion in 2006 prices.
Japan, the next largest economy, is likely to be only a quarter of the size of the two largest. India is likely to be in the fourth position with its national product slightly smaller than that of Japan’s. As the display in the chart shows the world has two very large economies and then 20 relatively smaller ones. There is considerable difference between the sizes of the two large economies and those that are smaller in size. By that time the G7 as currently constituted will not represent the largest economies in the world. Already two among the seven largest economies will be from what is now called the emerging world.
Eleven of the 22 largest economies are in Asia. In the 25 years that follow there is further realignment with China overtaking the United States. Its GDP is expected to increase to $70 trillion, three and a half times its size in 2025. The United States economy will also increase but will only double its size, increasing to $40 trillion.
India, according to these estimates, will be almost equal in size to the economy of the United States. What do these increases in the size of the economies suggest about the rates of GDP growth? To increase three and half times over a period of 25 years implies an annual average rate of growth of 5.2 per cent. This is projected to be the rate of growth of China. For the United States, the implied rate of growth is 2.9 per cent; for India, 8.7. These are in line with the consensus view of most economists. The question is whether these averages can be maintained over such long periods?
There will be other significant changes. Japan’s relative decline continues. It will drop from the third position in 2025 to the eighth in 2050. The country’s rate of GDP growth will be less than one per cent a year. Some other current leaders in the world economy will also see major changes in the relative ordering.
Germany is likely to drop from being the 5th largest in 2025 to the 10th largest in 2050, UK may go from the 7th to the 9th and France may move from the 8th to the 12th. Of the many surprises in these estimates is the change in the relative positions of the European economies with Britain becoming the largest in the continent. No European economy will be among the five largest in the world by 2050.
Indonesia and Nigeria will see major improvements in their positions; the former moving from 14th position in 2025 to the 7th while the latter jumps from the 18th to the 11th. Some of the Latin American economies are also expected to do well. Brazil and Mexico will become the world’s 4th and 5th largest respectively, moving up from the 9th and 11th positions.
Among the world’s five largest economies in 2050, two – China and India – will be Asian, two – Brazil and Mexico – will be Latin American and the 5th, of course, will be the United States. By then the current G7 grouping is totally irrelevant; the United States will be the only country from this group that will still be included among the seven largest in the world. It is clear that the need for revising the current institutional structure will increase with every passing year.
Pakistan is identified as one of the laggard nations, dropping its position in the global order from the 20th to the 21st between 2025 and 2025. It is estimated to perform poorly relative to other large Asian economies. Could the country do better than projected by the Goldman Sachs estimates which were obviously influenced by the poor performance of the economy in recent years? I will come back to this question a little later in the article.
What are the main drivers of growth as seen by Goldman Sachs? Three of these stand out; expected increases in the size of the population, access to natural resources, and trade competi tiveness. More populous countries do relatively well, in particular those that are investing in improving the quality of the human resource. For the countries that are seeing declines in population size – this includes all countries in continental Europe as well as Japan – aging populations will begin to weigh increasingly on economic performance. As the centre of gravity of the global economy shifts towards the emerging world, the use of natural resources, in particular oil, will increase. This is one reason why the oil-rich countries do relatively well in these estimates.
The inclusion of international trade as growth drivers suggests further globalisation in production processes. Trade as a proportion of total international product will continue to increase and the countries that are geared to take advantage of this development will do relatively well. Trade in parts and components will expand faster than the rate of increase in total trade. This will bring greater benefits to the countries that are well integrated in the changing global production process. Could Pakistan improve its situation as the world changes? It could but it will have to break from the recent trend. This will require at least four policy initiatives. The country will have to rely much more on internal resources for needed investment. Only then will it succeed in climbing on to a growth strategy that can be maintained over time. Second, it will need to improve the technical base of the economy.
This will mean, in turn, greater focus on human resource development. Third, it will need to restructure its economy so that it can better perform in the global production system. And, finally, it will need to focus much more on increasing trade as a proportion of its gross domestic product. It would necessary for the policymakers, as they devise the country’s future, to keep in mind what is happening to other economies in the world.