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The World in 2050 -- Perspective on Global Economic Competition and the Role of China

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-- Perspective on Global Economic Competition and the Role of China John Hawksworth Head of Macroeconomics PricewaterhouseCoopers Beijing, 16 May 2006 – PowerPoint PPT presentation

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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

2
Agenda
  • 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

3
Study 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

5
US
China
India
UK
Brazil
Russia
6
How 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

7
Projected real exchange rate changes ratio of
MERs to PPPs
MERs as of PPPs
8
Projected real exchange rate changes ratio of
MERs to PPPs
MERs as of PPPs
9
India
US
Brazil
UK
China
Russia
10
Korea
Russia
UK
China
India
11
Key model results
  • GDP growth
  • Relative size of economies
  • GDP per capita levels
  • Sensitivity analysis

12
China
India
Brazil
Russia
US
Japan
13
Projected average real GDP growth 2005-50
real GDP growth p.a.
14
Projected average real GDP growth 2005-50
real GDP growth p.a.
15
(No Transcript)
16
Relative size of E7 vs G7 economies 2005, 2025
and 2050
Index G7 GDP 100
17
China and India vs US GDP in 2050
Index US 100
18
China and India dominate E7 economies (relative
GDP at MERs)
Index US 100
19
Relative size of Big 4 economies market exchange
rates
Constant 2004 US bn
20
Relative size of Big 4 economies PPP exchange
rates
Constant 2004 US bn at PPPs
21
US
UK
Germany
Korea
Russia
Brazil
China
India
E7 still well below G7 on income per capita at
PPPs
22
Sensitivity 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

23
What 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

24
How 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

25
China ranks highest on cost reduction
India ranks highest on skilled talent pool
26
China is top priority on most measures
27
China 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

28
Relative 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
29
Potential 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

30
Potential 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

31
Public 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

32
Rise 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
33
Summary
  • 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
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