Global Economy

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In the perilous exercise of predicting the future of the global economy, two scenarios have emerged with a view toward 2050. Known as “continued globalization,” the first scenario is the rosy one that has been widely known. Spearheaded by Goldman Sachs, whose chairman of its Asset Management Division, Jim O’Neil, coined the term “BRIC” more than a decade ago, this scenario suggests that—in descending order—China, the United States, India, Brazil, and Russia will become the largest economies by 2050 (Figure 1.6). BRIC countries together may overtake the US by 2015 and the G-7 by 2032, and China may individually dethrone the US by 2026. In PPP terms, BRIC’s share of global GDP, which rose from 18% in 2001 to 25% currently, may reach 40% by 2050. In addition, by 2050, the N-11 as a group may become significantly larger than the US and almost twice the size of the Euro area. Broadening our thinking beyond a focus on acronyms such as BRIC and N-11, one interesting way is to identify the larger emerging markets (defined as exceeding 1% of global GDP by 2050). Nine of the N-11 may exceed the 1% of global GDP threshold by 2050. In addition, a number of other relatively smaller emerging markets (defined as not exceeding 1% of global GDP by 2050) will exhibit strong growth dynamism and potential (Figure 1.7). The upshot? While BRIC growth rates will slow down, emerging economies as a group—consisting of BRIC, N-11, and other “larger” and “smaller” emerging markets—will con- tinue to drive global growth. Goldman Sachs’s predictions have been largely supported by other influential forecasting studies. For example, Organization for Economic Cooperation and Development (OECD) predicted that by 2060, China, India, and the US will become the top three economies. The combined GDP of China and India will be larger than that of the entire OECD area (Figure 1.8). In 2011, China and India accounted for less than one-half of GDP of the seven major (G-7) OECD economies. By 2060, the combined GDP of China and India may be 1.5 times larger than the G-7. India’s GDP will be a bit larger than the US’s, and China’s a lot larger. Despite such dramatic changes, one interesting constant is the relative rankings of income per capita. Goldman Sachs predicted that by 2050, the G-7 countries will still be the richest, led by the US, Canada, and the UK (Figure 1.9). Ranked eighth globally (US$63,486—all dollar figures in this para- graph refer to 2010 US dollars), Russia may top the BRIC group, with income per capita approaching that of Korea. By 2050, per capita income in China (US$40,614) and India (US$14,766) will continue to lag behind developed economies—at, respectively, 47% and 17% of the US level (US$85,791). These predictions were supported by OECD, which noted that by 2060, Chinese and Indian per capita income would only reach 59% and 27% of the US level, respectively. Underpinning this scenario of “continued globalization” are three assumptions: (1) emerging economies as a group will maintain strong (albeit gradually reduced) growth; (2) geopolitical events and natural disasters (such as climate changes) will not create significant disruption; and (3) regional, international, and supranational institutions continue to function reasonably. This scenario envisions a path of growth that is perhaps more volatile than that of the past 20 years, but ultimately leads to considerably higher levels of economic integration and much higher levels of incomes in countries nowadays known as emerging economies. The second scenario can be labeled “de-globalization.” It is characterized by (1) prolonged recession, high unemployment, droughts, climate shocks, disrupted food supply, and conflicts over energy (such as “water wars”) on the one hand; and (2) public unrest, protectionist policies, and the unraveling of certain institutions that we take for granted (such as the EU) on the other hand. As protectionism rises, global eco- nomic integration suffers.

The upshot? Weak economic growth around the world. While global de-integration would harm econo- mies worldwide, regional de-integration would harm countries of Europe, especially those outside a likely residual core of the EU. Unable to keep growing sustainably, BRIC may become “broken bricks” and may fail to reach their much-hyped potential. For example, in the 1950s and 1960s, Russian economic growth was also very impressive, fueling Soviet geopolitical ambitions that eventually turned out to be unsupportable. In the late 1960s, Burma (now Myanmar), the Philippines, and Sri Lanka were widely anticipated to become the next Asian Tigers, only to falter badly. Over the long course of history, it is rare to sustain strong growth in a large number of countries over more than a decade. It is true that the first decade of the 21st century—prior to the Great Depression— witnessed some spectacular growth in BRIC and many other emerging economies. A key question concerns how unique the current times are. Historically, “failure to sustain growth has been the general rule,” according to a pessimistic expert. In both scenarios, one common prediction is that global competition will heat up. Competition under the “de-globalization” scenario would be especially intense since the total size of the “pie” will not be growing sufficiently (if not negatively). At the same time, firms would operate in partially protected markets, which result in additional costs for market penetration. Competition under the “continued globalization” scenario would also be intense, but in different ways. The hope is that a rising “tide” may be able to lift “all boats.” CASE DISCUSSION QUESTIONS 1. Which of the two scenarios is more plausible for the global economy in 2050? Why? How does that affect you as a consumer, as a professional, and as a citizen of your country? 2. From a resource-based view, what should firms do to better prepare for the two scenarios? 3. ON ETHICS: From an institution-based view, what should firms do to better prepare for the two scenarios? (HINT: For example, if they believe in “continued globalization,” they may be more interested in lobbying for reduced trade barriers. But if they believe in “de-globalization,” they may lobby for higher trade barriers.)

Sources: Based on (1) Foresight Horizon Scanning Centre, 2009, World Trade: Possible Futures, London: UK Government Office for Science; (2) Goldman Sachs, 2012, An update on the long-term outlook for the BRICs and beyond, Monthly Insights from the Office of the Chairman, Goldman Sachs Asset Management, January; (3) OECD, 2012, Looking to 2060: A global vision of long-term growth, Economics Department Policy Note 5, November; (4) M. W. Peng & K. Meyer, 2013, Winning the future markets for UK manufacturing output, Future of Manufacturing Project Evidence Paper 25, London: UK Government Office for Science; (5) R. Sharma, 2012, Broken BRICS: Why the rest stopped growing, Foreign Affairs, November: 2–7.