BRICS and Beyond

Mr John Hawksworth, Chief Economist, PricewaterhouseCoopers

 

By way of setting the scene for the Symposium theme, Mr John Hawksworth, Chief Economist, PwC, presented the findings of PricewaterhouseCoopers' 2011 report on The World in 2050. The key results pertain to the relative growth rates and size of economies by 2050, as well as relative average income levels. In setting the agenda for his presentation, Mr Hawksworth explained that he would look at these findings, and the key conclusion of the study that the global financial crisis has further accelerated the shift in global economic power to the emerging economies. He would also discuss what might derail growth in the emerging markets and the implications for business, in terms of both challenges and opportunities that this changing world order poses.

 

The series of reports on The World in 2050 began with a study in 2006, which covered the 17 largest economies in the world, based on GDP at PPPs (World Bank estimates). It included the G7, plus Spain, Australia and South Korea, as well as the E7 economies (the four BRICs plus Indonesia, Mexico and Turkey). The 2011 study was extended to include Vietnam, Nigeria, South Africa, Saudi Arabia and Argentina.

 

Having explained the background to the study, Mr Hawksworth discussed the methodological approach. The essence of the GDP growth model used is that long-term trend growth is driven by four key factors: investment in physical capital, working age population growth (based on the latest UN population projections), increases in human capital (proxied by average education levels), and catch-up with US productivity levels (at varying rates).

 

Mr Hawksworth clarified that the results are not forecasts of what will actually happen, but rather indicative growth potential, assuming broadly growth-friendly policies are followed (bearing in mind that some countries may not be able to sustain such policies in practice). The broad conclusions of the study on the shift in global economic power from the G7 to the E7 emerging economies should, however, be robust to these uncertainties, in the absence of major, catastrophic shocks that may derail the overall global economic development process.

 

Mr Hawksworth then talked about the relative size of economies, and the advantages of looking at both GDP at purchasing power parities (PPPs) and GDP at market exchange rates (MERs), explaining that GDP at PPPs is a better indicator of average living standards or volumes of outputs or inputs, because it corrects for price differences across countries at different levels of development. However, GDP at MERs is a better measure of the relative size of the economies from a business perspective, at least in the short term. Mr Hawksworth noted that the E7 economies are doing significantly better when measured in dollar terms at market exchange rates (MERs), than in PPP terms. He showed, for instance, that in India and China market exchange rates are still not that high but purchasing power parity is strong.

 

Mr Hawksworth then looked at UN projections of working age population growth, and referred to the effect aging has on economic growth. He remarked the limitations posed by China's ageing population and the fact that China's working population will not grow as fast in the future, due to its 'one child' policy. The populations of Russia, Japan and Korea, are also expected to age rapidly, with implications for their growth potential.

 

Mr Hawksworth then turned his attention to the relative projected growth rates to 2050. According to the PricewaterhouseCoopers report, emerging economies are set to grow much faster than the G7 for the next four decades. Moreover, the global financial crisis appears to have further accelerated the shift in economic power to the E7, as it hit the G7 much harder than the E7 in the short term, and it also caused revisions in estimates of longer term growth in the G7, especially in the UK and US, whose debt-fuelled growth in the past few decades now looks unsustainable. Consequently, PwC expects the E7 to overtake the G7 in terms of GDP at MERs as early as 2033 (revised from the 2006 report, which predicted this would happen only in 2042), and based on GDP at PPPs, total E7 GDP could exceed the G7 GDP before 2020. Thus, by 2050 E7 economies could become larger than G7 economies in both PPP and MER terms. Mr Hawskworth showed projections that China could overtake the US by 2020 in PPP terms, while in MER terms it would be in the early 2030s. Furthermore, by 2050 China, the US and India could be by far the largest economies (with a big gap to Brazil in fourth place). Other emerging economies could also see significant growth by 2050, with Brazil becoming bigger than Japan; Russia, Mexico and Indonesia bigger than Germany or the UK; and Turkey could be of similar size to Italy. However, looking at income per capita levels as an indicator of relative living standards in different economies, the PwC study observes that the E7 economies will still remain some way behind the G7 economies on this basis even in 2050.

 

Based on these projections, Mr Hawksworth discussed the risks, challenges and opportunities for business. He listed potential risks that could derail growth in the E7, specifically macroeconomic and political instability, for example overheating and property bubble in China, the problem of a mighty government bureaucracy and fiscal deficit in India and Brazil, over-reliance on oil and gas revenues in Russia (at the expense of high-tech investment), drug-related violence in Mexico, and political risks in China, India/Pakistan, the Middle East and Indonesia. Additional risks pertain to energy, water and transport infrastructure constraints, the threat of protectionism, and issues around natural resources and the growing demand for food, metals, etc. in relation to the global warming debate.

 

Yet, Mr Hawksworth still sees huge opportunities for retailers, global brand owners, business and financial services, creative industries, healthcare and education providers, and niche high value added manufacturers. Challenges remain for mass market manufacturers (both low-tech and increasingly high-tech), financial services companies not able to penetrate E7 markets who become vulnerable at home to E7 entrants, and companies that over-commit to the E7 without the right local partners and business strategies.

 

In conclusion, Mr Hawskworth summarised the findings of the PwC report, arguing that the global economic centre of gravity is shifting. The US, China and India are expected to be the three major economies by 2050, and Brazil could be the fourth largest economy in the world by 2050, ahead of Japan. India could grow faster, but China will likely remain much bigger. China will also face smaller rivals in Asia, like Indonesia and Vietnam. Russia could overtake Germany before 2030 and could become big in the European sphere, and Turkey could also emerge as one of the largest European economies. Finally, Mr Hawksworth concluded that there remain major challenges for the emerging economies to sustain their recent strong growth, and there exist huge opportunities for Western companies in emerging markets, but they are also likely to face great competitive challenges from fast-growing emerging market companies.

 

Speaker Bio

 

John Hawksworth is Chief Economist in PwC's UK firm and lead author of PwC's World in 2050 series of publications on long-term prospects for the world economy with a particular focus on emerging economies. He is also the author of many other reports and articles on macroeconomic and public policy topics and a regular media commentator on these issues. He has carried out economic consultancy assignments for a wide range of public and private sector organisations both in the UK and overseas over the past 20 years.