China passes the US to become the world’s largest economy by 2030, while India overtakes Japan, Germany, the UK and France to become number three. The economies of the emerging world as a whole become bigger than those of the developed world.
That is the scale of the shift of power predicted in a new study by HSBC into how the world economy could develop over the next 12 years. You’ll remember the famous BRICs report by Goldman Sachs, the one that showed how the four largest emerging economies – Brazil, Russia, India and China – would race ahead of developed economies. Well, China and India have certainly done so but, for different reasons, Russia and Brazil have disappointed. Then, in 2011, HSBC built an improved version of the economic model and came up with somewhat different results. In particular, it predicted Russia would not do nearly as well as earlier thought.
Now the HSBC economics team has refined its calculations and produced another version, looking at things it got – slightly – wrong and why, and predicting the global pecking order in 2030. The advance of China and India is the big story, but there are a number of other messages. One is that the US will continue to pull ahead of the rest of the developed world. Another is that the booming population of Africa will create opportunities and challenges. Another is that India’s neighbours, Pakistan and Bangladesh, will also shoot up the rankings.
Still another insight is that within Europe, while Germany will remain the largest economy, the UK will start to pull ahead of France, as numbers six and seven in the world, respectively. Italy will continue to languish, falling to number nine, while Spain will tumble from 13th to 16th. Eastern Europe will do well, but rich, small-population European nations with an ageing or declining workforce will slide. Austria and Norway will fall out of the top 30 while Denmark will drop out of the top 40, according to the model.
Rankings generate headlines and are fun but, more importantly, they examine the reasons why some countries could grow strongly and others languish. There are really two main drivers of growth: catch-up and frontier growth. For most of the emerging world it is catch-up: China, India, Nigeria – whichever nations apply the technologies developed by frontier economies.
So, China has become the world’s largest car manufacturer by applying the knowledge built in the US, Europe and Japan. Some Chinese cars resemble successful models from the developed world. Africa has benefited by applying mobile telephony developed in the US and Europe, leapfrogging the need for landlines and pioneering new applications such as banking by text.
Because, by and large, the emerging world has younger and faster-growing workforces than the developed world, catch-up is enhanced by demography.
So, the gap closes. Nothing wrong with that, for you would expect Bangladesh to grow faster than Norway. Some 70 per cent of global growth over the next 12 years will come from emerging markets.
For frontier economies, growth comes from figuring out how to improve the productivity of their workforces, pushing yet further upmarket and increasing labour participation rates. The first means better education and training, fostering entrepreneurs and so on. The second means cutting youth unemployment and increasing incentives – or reducing barriers – for older workers to stay in the labour market. For example, more than 10 per cent of over-65s in the UK are in work, compared with 4 per cent in Italy and only 3 per cent in France.
HSBC tries to allow for some of these factors. There are things an economic model cannot capture, such as the impact of the economic cycle or big political upheavals. Why has Venezuela done so much worse than the model predicted? Its dreadful politics. Technology is hard to predict too. Who could have foreseen, aside from Mr “this changes everything” Steve Jobs, the impact of the iPhone?
There is a further twist. This project does give a feeling for the way the world might look in 12 years’ time, and a world where two of the top three economies are in the emerging world will be very different from today. Most of us who are living in Western democracies will find it hard to adjust to the loss of the power and influence the West has enjoyed since the Industrial Revolution.
This is not just about economics and money – and for a while yet, the West will retain dominance in technology. It is also about ideas of how a society should be organised. It would be astounding, when China has become the world’s largest economy, if it did not influence us. For example, its ideas of how it manages its people – with a higher degree of social control we could currently accept – may come to seem attractive to many in Europe.
We will dislike some things we see, but acknowledge there are areas where we can learn. India – which will pass the UK this year or next – will shape Britain, just as Britain shaped India a hundred years ago. I would not suggest this be colonialism in reverse, with the East imposing ideas on the West, but rather a move to a world where each learns from the other.
At least, I hope we can learn. Because if we can’t, the next couple of decades will be difficult indeed.