The global economy is poised to enjoy decades of robust growth, as a number of poor countries play "catch-up" to the rich industrialised countries in terms of income and living standards, according to Citigroup’s global chief economist, Willem Buiter.
In a major new report, Global Growth Generators, Buiter nominates 11 countries that are most likely to drive global growth – and generate profitable investment opportunities – over coming decades. These '3G' countries are Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam.
As Buiter notes, all of these countries are currently poor, so their catch-up growth is likely to span decades. A number of them (Nigeria, Mongolia, Iraq and Indonesia) are also well-endowed with natural resources. And all – except China – enjoy favourable demographics.
As well, Buiter says that other countries, such as Mexico, Brazil, Turkey and Thailand, will likely enjoy rapid growth. But these countries need to make some economic adjustments, including boosting their domestic savings and investment levels, before they qualify for the 3G list.
Buiter, who is a former member of the Bank of England’s monetary policy committee, has a "fairly optimistic” outlook for real global GDP growth over the next four decades. He expects the world economy to grow in real terms by 4.2 per cent per annum between 2010 and 2050, which would boost real world GDP from $US72 trillion to $US380 trillion (measured in 2010 dollars).
The fastest growing regions will be Africa (which is forecast to grow real GDP by 7 per cent annually between 2010 and 2050), and developing Asia (5.4 per cent). Other regions such as central and eastern Europe, the former Soviet republics, Latin America and the Middle East are also likely to enjoy solid growth.
In contrast, the industrialised nations will see much more subdued growth.
Buiter notes that broad and sustained growth in real GDP per capita in today’s poorer economies will "much reduce the – often enormous – gap between their per capita incomes and those of today’s richest economies, i.e. we expect catch-up or convergence in per capita incomes.”
There will also be a shift in the balance of global economic power. North America and Western Europe’s share of real global GDP will likely drop from 41 per cent of global GDP in 2010, to just 18 per cent by 2050. On the other hand, developing Asia’s share of real global GDP is likely to jump from 27 per cent to 49 per cent by 2050.
China, Buiter predicts, will overtake the United States to become the world’s largest economy by 2020, only to in turn be eclipsed by India by 2050.
Buiter points out that sustained and widespread GDP growth is a fairly recent phenomenon, and that for most of human history improvements in living standards were virtually imperceptible. Indeed, there were long periods of time where living standards were steady, or even declined.
But more recently, a number of poor countries – mostly in East Asia, but also in the Middle East and elsewhere – have started to catch-up, reducing the gap between their living standards and productivity levels with those of the industrialised world.
Buiter argues the big game-changers have been globalisation – which has allowed for the freer movement of goods and factors of production – and the spread of the free-market economic model. Former communist and centrally planned economies have embraced some form of a market economy, as have other inward-looking poor countries that previously emphasised economic self-sufficiency, and whose intrusive regulation stifled economic activity.
These two factors only reached China in the 1980s, and for India, the former Soviet Union and the former central European countries in the early 1990s.
But, he says, the convergence process – as poorer countries catch-up with the richer countries in terms of productivity and income per head – will take decades.
"Despite the spectacular growth in China since about 1980 and in India since the early 1990s, real convergence of economy-wide productivity and income levels has barely started, with China’s real per capita GDP at barely 20 per cent of that of the US and India still well below the 10 per cent mark.
"There are, given the right institutions and policies, decades of catch-up growth in prospect even for China, and generations of catch-up growth for India. Many other countries in East Asia have also reached but a fraction of US per capita income levels. Some of them, such as Thailand, have seen fairly high per capita growth rates in past few decades already. Others, such as the Philippines, have not. All of them could potentially look forward to decades or generations of fast growth – as could many poor countries in other regions, particularly in Africa. "
Buiter says there are a number of factors that are favourable to high rates of economic growth, such as having a young population, having high quality institutions, promoting an open market-oriented economic structure, and encouraging foreign companies to invest directly in the country (which introduces superior technology, know-how and expertise). In addition, he says, it is important to focus (limited) public spending on infrastructure, health and education, and to encourage high levels of local savings to fund investment (relying on foreign savings can be risky).
Despite his relatively upbeat outlook for the global economy, Buiter warns that the path ahead will be "bumpy".
"There will be busts as well as booms. Beware of any proclamations of an end of volatility. Poor policies, conflict and natural disasters will change the growth equation for some countries in a negative way."
Still, he has little doubt "that the prospects for broad, sustained growth in per capita incomes across the world have not been as favourable as they are today for a long time – possibly in human history."