, Goldman Sachs
attempted to project which countries had the potential to become the world's largest economies over the next fifty years.
Rather than simply extrapolate a figure from current growth rates (the "straight line" method), the study projected development by applying existing models of capital accumulation, productivity growth and demographic transformation. The results of these models combined together allowed the researchers to get a good idea of future GDP growth (based on growth in employment, capital stock and technical progress), income per capita and currency movements. Their methodology also factored in the influence of productivity on currency values (and thus overall wealth in real terms, rather than just purchasing power parity). The 'catch up' effect (where less developed countries have more to gain, so can grow faster than developed countries) is also captured. Importantly, the ageing countries of Europe and Japan will not stagnate, thanks to being able to trade with and invest in the developing world.
The authors of the study expect us to assume that future governments will be competently run, fostering the macroeconomic stability (like low inflation, and sound fiscal and monetary policies), openness (to both foreign direct investment, and access to foreign trade), institutional governance and human development (specifically, education), required for their economies to flourish. Poor planning, or simple bad luck, could cause any country in the study to underperform.
To check the effectiveness of their methodology, the authors re-ran their model based on what the world looked like in 1960. Excluding factors that were essentially political and thus outside the scope of the study (e.g.: Latin America's stagnation), the projected average growth rates were suprisingly close to the actual outcomes, particuarly for developed countries with steady growth. The model however under-estimated Asia's economic growth trajectory.
So, which economies will be the largest over the next few decades?
In 2005 the world's economic system is preeminently dominated by the United States, with a GDP of $11.7 trillion. The other trillionaire countries in existence today are Japan ($4.4 trillion), Germany ($2.0 trillion), China ($1.7 trillion), Britain ($1.7 trillion), France ($1.5 trillion) and Italy ($1.2 trillion). So, let's us assume that on the basis of economic size alone, those countries would constitute G7 (sorry Russia and Canada).
Within five years, China overtakes Germany, to become the third largest economy behind the United States and Japan. This is in spite of China's growth beginning to slow from the breakneck double digit rates of the 1990s to around 7% in 2010, and later to around 5% at the end of the following decade. China's economy slowly cools, but Japan's economy is stone cold in comparison, with a real growth rate of barely a percentage point per year in the coming decade. In 2016, China passes the $5 trillion barrier and overtakes Japan to become number two in the world.
Also around this time, a new contender comes in to challenge Italy's tenuous membership to G7. India which had a GDP of a mere $604 billion in 2005 is growing at a consistent 6% per year. In 2011 it joins league of trillionaire countries and barely five years later is worth $1.5 trillion. What India enjoys that no other major country in the world has is a growing working age population, and a plentiful supply of Indian workers will help the country maintain a growth rates of around 6% consistently in the 2020s and 2030s. In 2016 India takes over Italy's position in G7, and shortly later overtakes France (2019) and Britain (2013).
Not that this spells gloom and doom for the rich countries of yesteryear. Living standards are still high, helped largely by trading and investing in fast growing countries. However, as capital flows to where investment is concentrated, their currencies either soften or remain overvalued. At least GDP per capita is also maintained by the population beginning to shrink - Japan's population went into decline as early as 2005. Otherwise, in 2020 the order in the G7 appears unchanged, with the United States on the top with a GDP of $16.4 trillion, followed by China ($7.1 trillion), Japan ($5.2 trillion), Germany ($2.5 trillion), Britain ($2.3 trillion), India ($2.1 trillion) and France (trailing the group at $1.9 trillion).
France is next to loose its throne, and it comes from an unexpected upstart. Somehow Russia has managed to get its act in order, despite its population shrinking. The accelerated loss of its pensioners will at least help Russia maintain a relatively high proportion of working age population. Even though in 2030 the average Russian is not even as well as off as what the average Briton was in 2000, the opportunites to catch up with the West are present. Russia's growth in the 2020s is around 3.5%, and in 2024 Russia gets invited to the G7 show. In quick succession she overtakes Britain (2027) and Germany (2029) to take the fifth spot.
The Brits can even rejoice when, after a sixty year interval, they become the dominant race in Europe after surpassing Germany in 2036. Britain's influence may be waning, but at least it remains Europe's strongman. At the same time their other soccer rivals, the Brazillians, have finally come of age, and in the same year Brazil joins G7. If the necessary structural adjustments take place that make Brazil more open to trade, saving and investment, then she can expect a solid 4% growth rate for the duration of this scenario.
By the middle of the century, the G7 summit would more likely to be held in Recife than Rambouillet. The countries which ran the world at the beginning of the year would be fewer in number, and those which still survive at the top will necessarily have required considerable economic and social transformation. Ruling the roost would be China with a GDP of $44.5 trillion. The United States was overtaken nine years earlier in 2041, and has clearly lost dominance with a comparatively modest GDP of $35.2 trillion. Indeed India, with the most favourable demographic profile of the major powers, is closing in with a GDP of $27 trillion. Far behind the big three are Japan ($6.7 trillion), Brazil ($6.1 trillion) and Russia ($5.9 trillion). Britain remains having a voice in the world through its Athenian power play and stays in G7 as the sole European power, with a GDP of $3.8 trillion.
Living standards in the former economic superpowers are still high. Americans remain the richest people on the planet, with a real GDP per capita of $83,710 - more than twice the 2000 figure. However, they (and even more so, the Europeans) are feeling a lot poorer than before. Not because their living standards are eroding - their GDPs per capita have also doubled in the past five decades - but because there are more rich people about from other countries. Whereas in 2005 the average German was six times richer than your average Russian, in 2049 the tables were turned when the GDP per capita for Russia exceeded Germany. The Indians are still what you could call poor, with a paltry $17,366 per head they almost are as impoverished as what those Italians were at the start of the twenty first century.
Now, I am not sure if it was scope creep that scared Goldman Sachs from making other assumptions. One doesn't have to be an environmentalist to wonder what will happen when 1.5 billion Chinese run riot with the living standards of what Americans enjoy today (assuming, of course, oil remains plentiful or is replaced by an alternative energy source).
The environmental, social and political challenges of transformation have largely been ignored in the model. One does however hope that the necessary precursors like education and good governance which countries like Brazil and Russia require to achieve the level of economic as described in this scenario, will also help these countries overcome and work with the inevitable challenges that economic growth will bring.