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A Survey of the World Economy September 16Th 2006 The new titans A survey of the world economy September 16th 2006 Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist The Economist September 16th 2006 A survey of the world economy 1 The new titans Also in this section A question of denition The borderline between rich and poor has be- come more uid. Page 3 Emerging at last Developing economies are having a good run. Page 4 More pain than gain Many workers are missing out on the rewards of globalisation. Page 6 More of everything Does the world have enough resources to meet the growing needs of the emerging economies? Page 9 Weapons of mass disination Competition from emerging economies has helped to hold ination down. Page 11 China, India and other developing countries are set to give the world economy its biggest boost in the whole of history, says Pam Woodall. Unnatural causes of debt What will that mean for today’s rich countries? Interest rates are too low. Whose fault is that? Page 12 AST year the combined output of emerg- in which these economic newcomers are Ling economies reached an important aecting the developed world. As it hap- milestone: it accounted for more than half pens, their inuence helps to explain a A topsy-turvy world of total world GDP (measured at purchas- whole host of puzzling economic develop- How long will emerging economies continue ing-power parity). This means that the rich ments, such as the record share of prots in to nance America’s spendthrift habits? countries no longer dominate the global national income, sluggish growth in real Page 14 economy. The developing countries also wages, high oil prices alongside low ina- have a far greater inuence on the perfor- tion, low global interest rates and Amer- Playing leapfrog mance of the rich economies than is gener- ica’s vast current-account decit. ally realised. Emerging economies are Emerging countries are looming larger If today’s rich world does not watch out, it driving global growth and having a big im- in the world economy by a wide range of could become tomorrow’s relatively poor pact on developed countries’ ination, in- measures (see chart 1). Their share of world. Page 16 terest rates, wages and prots. As these world exports has jumped to 43%, from newcomers become more integrated into 20% in 1970. They consume over half of the global economy and their incomes the world’s energy and have accounted for catch up with the rich countries, they will four-fths of the growth in oil demand in1 Acknowledgments provide the biggest boost to the world This survey has beneted from the help of many econo- economy since the industrial revolution. mists, not all of them mentioned in the text. The sta at 1 the IMF, BIS, OECD and the World Bank were particularly Indeed, it is likely to be the biggest stim- Why they matter generous with their time. Special thanks go to Eswar Pra- ulus in history, because the industrial Emerging economies as % of world total, 2005 sad, Jean-Philippe Cotis, Bill White, Matthew Slaughter, Nouriel Roubini, Brad Setser, Bert Homan, Jiming Ha, Yu revolution fully involved only one-third of 0 20406080100 Yongding and Arthur Kroeber. A forthcoming book by the the world’s population. By contrast, this World Bank, Dancing with Giants: China, India and the new revolution covers most of the globe, Population Global Economy, is highly recommended. so the economic gainsas well as the ad- Foreign-exchange reserves justment painswill be far bigger. As de- A list of sources can be found online Energy consumption veloping countries and the former Soviet GDP at PPP www.economist.com/surveys block have embraced market-friendly Exports An audio interview with the author is at economic reforms and opened their bor- www.economist.com/audio ders to trade and investment, more coun- GDP at market exchange rates tries are industrialising and participating Stockmarket capitalisation Past articles on related subjects are at in the global economy than ever before. www.economist.com/globalisation This survey will map out the many ways Sources: IMF; MSCI; BP 2 A survey of the world economy The Economist September 16th 2006 the developed economies will notch up Re-emerging 2 only 2.7%. If both groups continued in this Speeding ahead 3 Share of global GDP*, % way, in 20 years’ time emerging econo- GDP, % increase on year earlier mies would account for two-thirds of Emerging economies 8 Developed economies global output (at purchasing-power par- Emerging economies 100 ity). Extrapolation is always risky, but 7 there seems every chance that the relative 6 80 weight of the new pretenders will rise. Faster growth spreading more widely 5 60 across the globe makes a huge dierence to 4 global growth rates. Since 2000, world 40 GDP per head has grown by an average of 3 2 20 3.2% a year, thanks to the acceleration in Developed economies emerging economies. That would beat the 1 0 2.9% annual growth during the golden age 1000 1500 1820 1913 1950 2005 2025† of 1950-73, when Europe and Japan were 0 1985 90 95 2000 06* *At purchasing-power parity †The Economist forecasts rebuilding their economies after the war; Sources: OECD, Angus Maddison; IMF and it would certainly exceed growth dur- Source: IMF *Forecast ing the industrial revolution. That growth, 2 the past ve years. They also hold 70% of too, was driven by technological change mies because of its vast size and its un- the world’s foreign-exchange reserves. and by an explosion in trade and capital usual openness to trade and investment Of course there is more than one re- ows, but by today’s standards it was a gla- with the rest of the world. The sum of spectable way of doing the sums. So al- cial aair. Between 1870 and 1913 world China’s total exports and imports though measured at purchasing-power GDP per head increased by an average of amounts to around 70% of its GDP, against parity (which takes account of lower only 1.3% a year. This means that the rst only 25-30% in India or America. By next prices in poorer countries) the emerging decade of the 21st century could see the year, China is likely to account for 10% of economies now make up over half of fastest growth in average world income in world trade, up from 4% in 2000. world GDP, at market exchange rates their the whole of history. What is also new is that the internet has share is still less than 30%. But even at mar- Financial wobbles this summer acted made it possible radically to reorganise ket exchange rates, they accounted for well as a reminder that emerging economies production across borders. Thanks to in- over half of the increase in global output are more volatile than rich-country ones; formation technology, many once non- last year. And this is not just about China yet their long-run prospects look excellent, tradable services, such as accounting, can and India: those two together made up less so long as they continue to move towards be provided from afar, exposing more sec- than one-quarter of the total increase in free and open markets, sound scal and tors in the developed world to competition emerging economies’ GDP last year. monetary policies and better education. from India and elsewhere. There is also more than one denition Because they start with much less capital Faster growth that lifts the living stan- of emerging countries, depending on who per worker than developed economies, dards of hundreds of millions of people in does the dening (see box on the next they have huge scope for boosting pro- poor countries should be a cause for cele- page). Perhaps some of these countries ductivity by importing Western machin- bration. Instead, many bosses, workers should be called re-emerging economies, ery and know-how. Catching up is easier and politicians in the rich world are quak- because they are regaining their former than being a leader. When America and ing in their boots as output and jobs shift to eminence. Until the late 19th century, Britain were industrialising in the 19th cen- low-wage economies in Asia or eastern Eu- China and India were the world’s two big- tury, they took 50 years to double their real rope. Yet on balance, rich countries should gest economies. Before the steam engine incomes per head; today China is achiev- gain from poorer ones getting richer. The and the power loom gave Britain its indus- ing the same feat in nine years. success of the emerging economies will trial lead, today’s emerging economies boost both global demand and supply. dominated world output. Estimates by An- What’s new Rising exports give developing coun- gus Maddison, an economic historian, Emerging economies as a group have been tries more money to spend on imports suggest that in the 18 centuries up to 1820 growing faster than developed economies from richer ones. And although their aver- these economies produced, on average, for several decades. So why are they now age incomes are still low, their middle 80% of world GDP (see chart 2). But they making so much more of a dierence to classes are expanding fast, creating a vast were left behind by Europe’s technological the old rich world? The rst reason is that new market. Over the next decade, almost revolution and the rst wave of globalisa- the gap in growth rates between the old a billion new consumers will enter the tion.
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