International | May 17 2006
By Chris Shaw (Tokyo)
As the strong growth in the Chinese and Indian economies continues, the question of when or if they will become bigger than the US economy at some point in the future becomes more relevant. Such an outcome has prompted PriceWaterhouseCoopers (PWC) to conduct a study into the possible sizes of both the emerging and G7 economies in 2050 and the implications of its estimates.
The study compares the current G7 nations (US, Japan, Germany, France, UK, Italy and Canada) plus Australia, Spain and South Korea against what it dubs the E7, the seven largest emerging economies. This group consists of China, India, Brazil, Russia, Indonesia, Mexico and Turkey.
While admitting there is no correct way to measure likely growth over such an extended period, PWC has attempted to provide two measures of GDP, one using market exchange rates and one based on purchasing power parity (PPP). The former is a better measure of the size of markets in its view, while it suggests the latter is better for factoring in measures such as the standard of living.
The findings may surprise many readers, as the study suggests by 2050 the E7 economies should be around 25% larger than the G7 economies when measured in dollar terms, but in PPP terms this increases to about 75% bigger. Currently they are about one-fifth the size of the G7 group in dollar terms and 75% as big in PPP terms.
Such changes are unlikely to be smooth, as for example the study shows even within E7 nations there will be changes in population growth rates and therefore their relative growth rates. As an example, while Japan currently has an ageing population a similar story will unfold in China and Russia between now and 2050, whereas Indonesia and Brazil for example will continue to see a decline in the average working age of the population in the period.
Factoring in all the different variables, the study suggests India is likely to be the fastest growing economy between now and 2050, to the extent its GDP should roughly match that of the US in PPP terms by the end of this period. China will be the biggest economy on such a measure though, as it is expected to be 40% larger than the US in PPP terms. Indonesia would complete the top three fastest growing economies, while Japan, Germany and Italy are likely to slide down to the bottom of the countries on the list in terms of economic growth rate.
While this may appear a rather disconcerting outcome for the G7 and OECD nations, PWC suggests there are actually ways these cpuntries can stand to benefit from such changes. Firstly, it makes the point average income levels should be higher across the board, which would create new market opportunities.
The study also suggests the development of a larger world market would allow nations to specialise in areas where they have a comparative advantage. As a result, both developed and emerging countries should see benefits from the growth profile.
PWC suggests likely winners from such outcomes include retailers, companies with strong global brands, those that add value through niche operations, financial service companies, media and energy and utility companies.
Having said that PWC concedes there will be losers, as mass market manufacturers are likely to find competition much stronger than is currently the case, while low and medium-skilled workers are likely to experience a squeeze from the likely influx of low cost workers. Companies that commit too many resources to these emerging markets without sound business models are also likely to struggle according to the study.
To maximise potential gains the study concludes nations should be attempting to maximise education opportunities for their populations in attempts to benefit from new markets and to create cross-cultural advantages, while there should be attempts made to avoid a return to more protectionist policies and subsidies for industries that cannot compete on global terms.
