Title: The World in 2050 -- Perspective on Global Economic Competition and the Role of China
1 The World in 2050 -- Perspective on Global
Economic Competition and the Role of
China
- John Hawksworth
- Head of Macroeconomics
- PricewaterhouseCoopers
- Beijing, 16 May 2006
2Agenda
- Methodology
- Growth model and key assumptions
- Market exchange rates vs PPPs
- Key results focus on China and India
- Implications for OECD and Chinese companies
- Public policy issues
- QA
3Study covers the 17 largest economies in the
world in 2004 based on GDP at PPPs (World Bank
estimates)
- G7 plus Spain, Australia and South Korea
- E7 economies
- BRICs (Brazil, Russia, India and China)
- Indonesia, Mexico and Turkey
- Note methodology could easily be extended to
other countries (though probably not small, very
open economies like Ireland)
4 Growth model structure
- Each country modelled individually but with
linkages via US productivity growth (the global
technological frontier) - Cobb-Douglas production function with human
capital included - Growth driven by
- Investment in physical capital
- Working age population growth (UN projections)
- Investment in human capital (rising average
education levels) - Catch-up with US productivity levels (at varying
rates 0.5-1.5 per annum of the TFP gap closed
each year) - Real exchange rates vary with relative
productivity growth
5US
China
India
UK
Brazil
Russia
6How to compare GDP Market exchange rates or PPPs?
- GDP at PPPs a better indicator of
- Relative living standards (GDP per capita)
- Volume of outputs or inputs (oil, carbon
emissions etc) - GDP at market exchange rates better for assessing
current market size for investors/exporters into
emerging economies - - but need to allow for real exchange rate
changes in longer term projections
7Projected real exchange rate changes ratio of
MERs to PPPs
MERs as of PPPs
8Projected real exchange rate changes ratio of
MERs to PPPs
MERs as of PPPs
9India
US
Brazil
UK
China
Russia
10Korea
Russia
UK
China
India
11Key model results
- GDP growth
- Relative size of economies
- GDP per capita levels
- Sensitivity analysis
12China
India
Brazil
Russia
US
Japan
13Projected average real GDP growth 2005-50
real GDP growth p.a.
14Projected average real GDP growth 2005-50
real GDP growth p.a.
15(No Transcript)
16Relative size of E7 vs G7 economies 2005, 2025
and 2050
Index G7 GDP 100
17China and India vs US GDP in 2050
Index US 100
18China and India dominate E7 economies (relative
GDP at MERs)
Index US 100
19Relative size of Big 4 economies market exchange
rates
Constant 2004 US bn
20Relative size of Big 4 economies PPP exchange
rates
Constant 2004 US bn at PPPs
21US
UK
Germany
Korea
Russia
Brazil
China
India
E7 still well below G7 on income per capita at
PPPs
22Sensitivity analysis
- Results are particularly sensitive to assumptions
on - investment rates
- education level trends
- catch-up rates for E7 economies
- real exchange rate relationship to productivity
(for GDP at MERs) - Perfectly possible that China relative to US
could be 30 higher or lower than base case in
2050 but would not alter the broad direction of
change - Model allows effect of alternative assumptions to
be explored
23What might derail growth in China and India?
- Macroeconomic instability
- Overheating in China
- Fiscal deficit in India
- Energy, water and transport infrastructure
constraints - Over-investment without proper capital allocation
mechanisms (c.f. Japan in 1980s/1990s) - Protectionism in key export markets (US/EU)
- Political instability
- Environmental crises
24How can the OECD economies compete with China,
India and other E7 economies?
- Competitive advantage vs comparative advantage
- Some commentators focus on the former -gt
relative pessimism - Economists tend to focus on the latter -gt
relative optimism (though there will be winners
and losers) - recent PwC survey suggest multinational CEOs
also mostly positive about opportunities in BRICs
25China ranks highest on cost reduction
India ranks highest on skilled talent pool
26China is top priority on most measures
27China and India have different comparative
advantages
- India has strengths in
- IT skills and technologies
- low cost English speaking staff for offshoring
services - younger population
- China has advantages in
- low cost manufacturing
- higher average education levels
- higher savings and investment rates
- Should create potential for mutually beneficial
trade - But also competing for resources to support
growth
28Relative competitiveness rankings China vs India
Country rankings (out of 117) China India
Overall global competitiveness index 49 50
- Technology sub-index 64 55
- Public institutions sub-index 56 52
- Macroeconomics environment sub-index 33 50
Business competitiveness index 31 57
Source World Economic Forum Global
Competitiveness Report 2005
29Potential impact on OECD companies over next 10
years
- Winners
- Retailers
- Global brand owners
- Business and financial services
- Creative industries
- Healthcare and education providers
- Niche high value added manufacturers
- Losers
- Mass market manufacturers (both low tech and
increasingly hi-tech) - Financial services companies not able to
penetrate E7 markets who become vulnerable at
home to E7 entrants - Companies that over-commit to E7 without right
local partners and business strategies
30Potential longer term challenges for Chinese
companies
- Gradual loss of cost advantages to other emerging
markets - Rising input costs (energy, metals etc)
- Competition from OECD companies in domestic
market as effects of WTO membership continue to
feed through - Overseas investments choosing the right targets
and not overpaying for them (c.f. Japan) - Moving from technological imitation to innovation
- Developing domestic capital markets
- Adapting to an ageing labour force
31Public policy issues for China (and other
countries)
- Danger of protectionist response from US/Europe
- Capital market development and banking sector
reform - Rural-urban income inequalities (land reform?)
- Energy and water supply
- Education
- Environmental issues
- Domestic air and water quality, soil erosion,
deforestation etc - Global challenge of climate change
32Rise of China and India will push up C02
emissions unless offsetting measures taken to
reduce energy/carbon intensity
GtC
Source IPCC scenarios (2000), preliminary PwC
model estimates
33Summary
- The E7 are coming!
- US, China and India to be three major economies
by 2050 - India could actually grow faster than China
beyond c.2015 - Brazil, Russia, Indonesia, Mexico and Turkey
smaller but also potentially significant - Potential win-win for the UK and other OECD
economies if they can remain open, flexible and
focused on human capital - China and India potential partners as well as
rivals - Major public policy challenges not least
climate change