This comment from Business World of 17 November 2003 points out the missing variable in a Goldman Sachs projection of world economy to 2039 - quality of national policies.
A lac a month
for all
The BRICs – Brazil, Russia, India and
China –are the growth studs of the next half-century. In 2000, their combined
income was $2.7 trillion. The combined income of G6, the six major developed
countries – US, Japan, Germany, Britain, France and Italy – was $19.7 trillion.
Dominic Wilson and Roopa Purushothaman (WP) of Goldman Sachs think that by
2039, the combined income of the BRICs will be $44.1 trillion, whilst that of
G6 will be $43.2 trillion. By 2050, G6 will get to $54.4 trillion – by which
time the BRICs’ combined income will be $84.2 trillion. China will overtake the
US and will have the largest GDP in 2041; India will surpass Germany in 2032
and become the third largest economy after US and China.
Largest does not
mean richest even now; there are countries like Saudi Arabia whose economies
are small but incomes per head are very high.. China’s income per head in 2050
will be $31000 – lower than that of Italy ($41000), the poorest of the G6;
American income per head will be $84000. India will lag even further behind at
$17000 – lower than Italy’s $19000 in 2000. Only Russia’s $50000 in 2050 will
be comparable to those of G6. But that $17000 is 35 times India’s 2000 income
per head of $468. It is equal to a family income of Rs 250,000 a month,
assuming that family size will fall by then to 4. Even the poorest 10 per cent
should be receiving a family income of Rs 50000 a month.
These figures
should not be thought of in terms of present purchasing power. India’s exchange
rate would appreciate by 281 per cent – to roughly Rs 15 to the dollar. That
would raise the standard of living only insofar as India imports goods and
services. Indians would grow 35 times richer if they were to export all they
produced and import all they consumed; they would grow only 13 times richer if
they imported or exported nothing. At present the import and export ratios are
close to 1/8; at that level, Indians’ standard of living would rise only about
16-fold. The Japanese yen is thrice as expensive in terms of the US dollar as
it was 50 years ago. But Japan even today has a comparatively low trade ratio.
That is why anyone who goes to Japan will find it extremely expensive – and why
the appreciation of the yen has not made the Japanese much richer.
Why do WP think
the BRICs will achieve such spectacular growth? They feed various figures into
a model, and it rewards them with the cheerful results. First they feed in
population projections for the countries made by US Census; they assume that
all the countries will approach stationary population, but that the faster
their population is growing now, the further away the stationariness will be.
Population figures generate the labour force. WP project the present investment
ratios all the way to 2050, except for China where they reduce it from the
current 36% to 30% after 2010. These assumptions, plus a rate of depreciation
of 4%, give them the growth rate of capital. They assume income to be divided
between capital and labour in the ratio of 1:2. Finally, they assume that
labour and capital in the US will become 1.3% more productive every year thanks
to progress of technology, and that the poorer a country, the higher its rate
of technical progress will be. The closer it comes to the US in income per head,
the more will its technical progress slow down. This is called convergence. Two
things give India a big boost: its rapid population growth means faster growth
of labour force, and its poverty means a high rate of technical progress.
Why should this
model be a good predictor of future growth? WP test it against the known
figures for 1960-2000. It works well for rich countries. It overestimates
India’s and Brazil’s growth, and underestimates China’s growth. And that is
what it will do for the next 50 years as well if our economic policies continue
to be as stupid as they are now. To grow faster, you have to learn to do so.
This government has bought political support by imposing absurdly high import
duties on the goods produced by agriculture and every industry that asked for it; all these hothouse
plants can never conquer the world market, and can never grow as fast as
Chinese industries.
