New reasons to score an Asian century

A fresh report from the OECD underlines why Australia's economic future is inextricably bound to Asia, and why government and business must embrace the trend.

The OECD research paper, Looking to 2060: A Global Vision of Long-Term Growth, shows how the structure and dynamics of the global economy will change over the next 50 years. It canvasses a range of very long-term issues that will inevitably dominate economics, policy and human wellbeing for the next couple of generations.

For Australia, the global economic themes highlighted by the OECD dovetail nicely with the government’s recent Australia in the Asian Century white paper.

The OECD 2060 research paints a clear picture of just how massive the shifts are for the globe and what these changes should mean for policy makers and the corporate sector. It points to so-called country economic convergence, which is the description of how divergent growth rates mean that the gap between the rich and poor nations will close dramatically over the next few decades. The developing countries of 2012 will rapidly get richer, while the current rich countries will register only moderate gains in output on average and it is probable that some will register particularly weak growth.

For the purposes of the OECD research, non-OECD countries were broadly categorised as today’s emerging or developing markets, while OECD countries currently are the wealthy ones with the highest per-capita GDP.

The report suggests that over the next 50 years, non-OECD countries will grow at a faster pace than the OECD average, but that the differential growth rates will close. The report suggests that "from over 7 per cent per year over the past decade, non-OECD growth will decline to around 5 per cent in the 2020s and to about half that by the 2050s.” In other words, as the developing countries urbanise, increase the skill level of their workforces and experience demographic change, their growth rate will slow. This is where the likes of Japan, the UK, the US and the bulk of Europe are at the end of many decades of very rapid growth.

This also shows up in the OECD assessment that "until 2020, China will have the highest growth rate of any country, but will be then surpassed by both India and Indonesia. These trends in GDP growth are driven by population ageing, which will exert downward pressure on labour input, and productivity developments.”

In other words, over the next decade, China’s average GDP growth will slow towards 6 per cent, while India and Indonesia’s average GDP growth is likely to be around 7 per cent.

These growth dynamics will further change the composition of the global economy. The OECD report confirms the fact that on a purchasing power parity basis, China is projected to pass the eurozone as the second biggest economy in the world and, within a few years, will also surpass the US. India is overtaking Indonesia to now be the third largest economy in the world and the OECD estimates that in 20 years, it will be larger than the eurozone.

Taken together, the OECD estimates that the "faster growth rates of China and India imply that their combined GDP will exceed that of the major seven (G7) OECD economies by around 2025 and by 2060 it will be more than 1½ times larger, whereas in 2010 China and India accounted for less than one-half of G7 GDP.”

"Strikingly, the combined GDP of these two countries will be larger than that of the entire OECD area, based on today’s membership, in 2060, while it currently amounts to only one-third of it.”

These are extraordinary changes. They reinforce the scenario that in the next 10 to 20 years, trends on the Shanghai or Mumbai stock exchanges will be as important, if not more important, that what happens on Wall Street. It means that in the not-too-distant future, policy changes in Indonesia will be more important that in the UK, France and even Germany.

As a demonstration of the rising living standards and the closing of the gap between developing and developed countries, the OECD estimates that average GDP per capita will grow by around 3 per cent per annum over the next 50 years, a stark outperformance relative to the average 1.7 per cent in the OECD area.

The bottom line of this, according to the OECD, is that "GDP per capita in the poorest economies (in 2011) more than quadruples … whereas it only doubles in the richest economies. China and India will experience more than a seven-fold increase of their income per capita by 2060.”

It is Asia, so very clearly, where Australia needs to maintain and build its economic, investment and cultural engagement. It seems so obvious.

Let’s hope that government, business and the general population of Australia warm to these trends. Europe, the US and the UK will still be nice places to visit, but the economic future is at our doorstep, a point confirmed by the OECD report.