Who defines the next economic giants?

India's economy has a really good chance of becoming the world's third-largest before 2040

Who defines the next economic giants?

We all know that the United States is one — its economy still makes up some 20 per cent of global gross domestic product despite a modest relative decline in recent years. But who else? And does the word “giant” refer only to economic size, or should it also be reflective of a country’s wealth, its people’s prosperity and other measures of their lifestyle — perhaps even their freedoms?

It isn’t easy to make simple distinctions, other than for the United States, which on virtually all criteria is easily at the top of such a group, and looking into the future — at least the next 20 to 30 years — seems set to remain so.

A country’s economic size is essentially driven by two long-term forces: the nation’s workforce in terms of the number of people able and eligible to work, and its productivity. The size of the workforce is mostly driven by the country’s demographics, although its immigration policies, its stance on when young people can begin work and its retirement age all have an influence.

So by and large, the world’s largest economies tend to be found in places where there are a lot of people.

On the list of the top 20 largest economies in the world, most have large populations. From the developed world, Japan (No. 3), Germany, France, Britain and Italy all sit among the top 10, although their relative ranking has slipped in the past decade as China, Brazil and Russia have entered this group.

Over the remainder of this decade, Italy might find it a challenge to remain in the top 10, and going into the 2021-30 decade, the other so-called developed economies outside of the United States will, too.

While Japan and Germany’s economies might be considered very large by developed country standards, these countries are not economic giants. China has the second-largest economy in the world; it has become almost twice the size of Japan’s and is actually now bigger than Germany’s, France’s and Italy’s combined.

Is China a giant? If it doesn’t have a gargantuan economy already, it is certainly headed in that direction. In addition to being as big as continental Europe’s three largest economies put together, China’s economy is about 55 per cent the size of the United States’ in current US dollars, and based on recent estimates from the World Bank International Comparison

Programme, it is probably slightly bigger
than the United States’ in purchasing power parity terms.

It is also, in US-dollar terms, one and a half times the size of the other three so-called BRIC economies combined (Brazil, Russia, India and China), and if its growth continues in the 7-7.5 per cent vicinity, with inflation around 3 per cent and the

value of its renminbi stable to modestly rising, it is adding another $1 trillion to global GDP every year. I often point out to people that China is adding another India to the world economy every two years.

Still, it seems to me that although China’s current wealth is in the $7,000-$8,000 per capita vicinity because of its 1.3 billion people, which is multiples lower than that of the United States and other developed economies, China should be considered a giant. It is the only one of the four BRIC economies that continues to match my previous expectations and forecasts.

In the path to 2050, where with colleagues I first highlighted the dramatic potential of the BRIC economies, I assumed that China’s economy would grow by around 7.5 per cent this decade. The last time I updated my assumptions was in 2010, and so far this decade, it has grown by 8.2 per cent — more than I had assumed.

While its growth rate has slowed, and is likely to slow further, I still believe that sometime around 2025-27, China’s economy has a reasonable chance of becoming as large as the United States’ in US-dollar terms.

It is already the major trading partner for many countries – both exports and imports – and I would expect that before this decade is over, possibly quite a bit before, China will replace the United States as the world’s largest importer. From the rest of the world’s perspective, China will certainly be an economic giant then.

Many people talk about how disappointing China has been as an investment, but this is not completely true. While the most popular Chinese stock indexes have underperformed other major indexes, some Chinese markets like the Shenzhen have done well.

Investors need to focus on the “new” China and avoid the “old” China, choosing investments in the Chinese consumer and new and alternative energies and technologies instead of the low-valued manufacturing and commodity-guzzling companies of the past.

What about the other BRIC countries? Some years after I first coined the acronym in 2001, I suggested that a BRIC economy should be regarded as one that was already producing or had the clear potential to produce 5 percent of global GDP or more. China’s is the only one that qualifies, but at the time I believed that the other three BRIC economies had that potential.

Today, the economies of Brazil, India and Russia are all generating around 3 per cent of global GDP, similar to Italy. But the countries’ big populations and reforms to lift productivity still mean their economies have a reasonable chance of going above that 5 per cent threshold. They may someday become giants.

India’s chance
At the time of writing, I am quite confident that India will make this leap – its economy has a really good chance of becoming the world’s third-largest before 2040.

The country has exceptionally favourable demographics, and in electing Prime Minister Narendra Modi, India has given itself the best chance in at least 30 years of being run by a government that is not smothered by its democracy but flourishes instead. The stock market has taken note, and I would expect a continued positive repricing of Indian investments.

Brazil and Russia’s economies have different reasons for their recent disappointments, but they share a common dilemma: They are too dependent on volatile commodities. Unless they can shift away from that dependency, their paths will remain volatile, influenced by the vagaries of commodity prices.

Of the rest of the world’s largest populated countries, I believe none has a realistic chance of producing 5 percent of global GDP or more, but there are a few that could reach the 3-5 percent range, or more than Italy, which currently has the world’s eighth-largest economy. Mexico, Indonesia, Nigeria and Turkey – the so-called MINT economies – along with the more developed South Korea, have this chance.

Mexico in some ways is going to be especially interesting to watch for the rest of this decade, since the scale of reforms undertaken by its government are vast – they should help boost the growth rate considerably compared to the economy’s meager performance of the past 20 years or more.

Creating a more competitive energy industry with cheaper electricity costs might not solve all the country’s problems, but many parts of the economy should benefit.

I have travelled quite often to all four MINT nations in the past 12 months, and while they have many challenges, they all have exciting potential, and could become mini-giants, if not quite on the scale of some of their well-known BRIC colleagues.
International New York Times

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