Transcript Document 7276618

The World in 2050
-- Perspective on Global Economic Competition
and the Role of China
John Hawksworth
Head of Macroeconomics
PricewaterhouseCoopers
Beijing, 16 May 2006
Agenda
Methodology
- Growth model and key assumptions
- Market exchange rates vs PPPs
Key results: focus on China and India
Implications for OECD and Chinese companies
Public policy issues
Q&A
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Study covers the 17 largest economies in the world in 2004
based on GDP at PPPs (World Bank estimates)
G7 plus Spain, Australia and South Korea
E7 economies
- BRICs (Brazil, Russia, India and China)
- Indonesia, Mexico and Turkey
Note: methodology could easily be extended to other countries
(though probably not small, very open economies like Ireland)
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Growth model structure
Each country modelled individually but with linkages via US
productivity growth (the global technological frontier)
Cobb-Douglas production function with human capital included
Growth driven by:
- Investment in physical capital
- Working age population growth (UN projections)
- Investment in human capital (rising average education levels)
- Catch-up with US productivity levels (at varying rates: 0.5-1.5%
per annum of the TFP gap closed each year)
Real exchange rates vary with relative productivity growth
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Figure 1: Relative GDP at market exchange rates and PPPs (2004)
120
US
100
Index relative to US = 100
China
80
GDP at market exchange rates
GDP at PPPs
60
India
40
UK
Brazil Russia
20
Ru
ss
ia
Tu
rk
ey
In
do
ne
sia
zil
Br
a
Ko
re
a
M
ex
ico
Au
st
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lia
In
di
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na
da
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Ca
Sp
a
Ita
ly
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in
Ch
ce
Fr
an
UK
Ja
pa
n
G
er
m
an
y
US
0
Source: World Bank
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How to compare GDP: Market exchange rates or PPPs?
GDP at PPPs a better indicator of:
- Relative living standards (GDP per capita)
- Volume of outputs or inputs (oil, carbon emissions etc)
GDP at market exchange rates better for assessing current
market size for investors/exporters into emerging economies
- but need to allow for real exchange rate changes in longer term
projections
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Projected real exchange rate changes: ratio of MERs to PPPs
Mexico
Russia
Brazil
Turkey
2005
Indonesia
China
India
0
20
40
60
80
100
MERs as % of PPPs
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Projected real exchange rate changes: ratio of MERs to PPPs
Mexico
Russia
Brazil
2005
2050
Turkey
Indonesia
China
India
0
20
40
60
80
100
MERs as % of PPPs
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Figure 3: Projected average growth rate of working age population: 2050-50
1.0%
India
Brazil
US
0.5%
% change per annum
UK
0.0%
-0.5%
China
-1.0%
Russia
Ru
ss
ia
Ko
re
a
Ja
pa
n
in
Ita
ly
er
m
G
Sp
a
an
y
a
in
Ch
ce
UK
Fr
an
Ca
na
da
lia
Au
st
ra
es
ia
In
do
n
US
o
ex
ic
M
zil
Br
a
Tu
rk
ey
In
di
a
-1.5%
Source: UN
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Figure 4: Human capital per worker relative to the US
120
Korea
Russia
UK
100
Index relative to US = 100
China
India
80
2050 estimate
2004 estimate
60
40
20
zil
Br
a
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pa
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Ja
an
y
er
m
G
ss
ia
Ru
Ko
re
a
lia
Au
st
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Ca
na
da
0
Source: PwC estimates using base data from Barro and Lee (2001)
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Key model results
GDP growth
Relative size of economies
GDP per capita levels
Sensitivity analysis
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Figure 6: Real GDP growth in US, Japan and the BRICs
7.0%
China
6.0%
India
5.0%
% real growth
Brazil
US
China
India
Brazil
Russia
Japan
4.0%
Russia
3.0%
US
2.0%
Japan
1.0%
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20
50
20
48
20
46
20
44
20
42
20
40
20
38
20
36
20
34
20
32
20
30
20
28
20
26
20
24
20
22
20
20
20
18
20
16
20
14
20
12
20
10
20
08
20
06
0.0%
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Projected average real GDP growth: 2005-50
Japan
Germany
UK
US
Russia
Domestic currency
Mexico
Brazil
Turkey
China
Indonesia
India
0
2
4
6
8
% real GDP growth p.a.
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Projected average real GDP growth: 2005-50
Japan
Germany
UK
US
Russia
Domestic currency
US $ terms
Mexico
Brazil
Turkey
China
Indonesia
India
0
2
4
6
8
% real GDP growth p.a.
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Figure 7: Relative size of G7 and E7 economies
140000
120000
$ billion (2004 real
values)
100000
80000
G7 GDP
E7 GDP
60000
40000
20000
0
2005 MER
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2050 MER
2005 PPP
2050 PPP
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Relative size of E7 vs G7 economies: 2005, 2025 and 2050
Index: G7 GDP = 100
200
180
160
140
120
100
80
60
40
20
0
2005
2025
2050
GDP at MERs
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GDP at PPPs
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China and India vs US GDP in 2050
Index: US = 100
160
140
120
100
2005
2025
2050
80
60
40
20
0
China at MERs China at PPPs
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India at MERs
India at PPPs
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China and India dominate E7 economies (relative GDP at MERs)
Index: US = 100
120
100
80
2005
2025
2050
60
40
20
0
S
U
na
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C
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Relative size of Big 4 economies: market exchange rates
Constant 2004 US $bn
40000
35000
30000
US
China
India
Japan
25000
20000
15000
10000
5000
0
2008 2013 2018 2023 2028 2033 2038 2043 2048
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Relative size of Big 4 economies: PPP exchange rates
Constant 2004 US $bn at PPPs
60000
50000
40000
US
China
India
Japan
30000
20000
10000
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2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
2006
0
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Figure 8: Projected GDP per capita in PPP terms
100000
US
90000
UK
Germany
80000
Korea
2004 $ per capita at PPPs
70000
60000
Russia
50000
2005
2050
Brazil
40000
China
India
30000
20000
10000
di
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Tu
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Ja
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UK
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US
0
E7 still well below G7 on
income per capita at PPPs
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Sensitivity analysis
Results are particularly sensitive to assumptions on:
- investment rates
- education level trends
- catch-up rates for E7 economies
- real exchange rate relationship to productivity (for GDP at MERs)
Perfectly possible that China relative to US could be 30% higher
or lower than base case in 2050 – but would not alter the broad
direction of change
Model allows effect of alternative assumptions to be explored
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What might derail growth in China and India?
Macroeconomic instability:
- Overheating in China
- Fiscal deficit in India
Energy, water and transport infrastructure constraints
Over-investment without proper capital allocation mechanisms
(c.f. Japan in 1980s/1990s)
Protectionism in key export markets (US/EU)
Political instability
Environmental crises
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How can the OECD economies compete with China, India and
other E7 economies?
Competitive advantage vs comparative advantage
- Some commentators focus on the former -> relative pessimism
- Economists tend to focus on the latter -> relative optimism
(though there will be winners and losers)
- recent PwC survey suggest multinational CEOs also mostly
positive about opportunities in BRICs
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Figure 9: Accessing new customers is the key driver for doing
business in emerging economies
Ref: Q5. Which of the following business objectives are driving your decision to do business in………………..?
20
China ranks highest
on cost reduction
48
Reducing costs
39
18
30
38
35
Increasing capacity
28
Brazil
China
India
Russia
76
75
74
Accessing new
customers
82
56
Serving existing
customers
50
46
48
India ranks highest
on skilled talent pool
11
Accessing a highly
skilled talent pool
22
35
12
0
20
40
60
80
100
%
Source: PricewaterhouseCoopers’ 9th Annual Global CEO Survey. All respondents, except Brazil, China, India and Russia (331-674)
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Figure 10: Main actions that CEOs are taking/planning to take in
emerging economies
Ref: Q6. Which of the following actions is your organization taking or planning to take in………………..?
19
Outsourcing manufacturing activities or support
services to a third party
30
17
15
Offshoring manufacturing activities or support
services within your own company
28
13
China is top
priority on most
measures
34
33
35
Opening new offices
44
Engaging in mergers and acquisitions
22
54
48
Brazil
China
India
Russia
26
27
26
47
Forming alliances with partners
32
Developing unique products for this market
28
0
Source: PricewaterhouseCoopers’
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32
40
12
10
11
11
Making charitable donations/performing other probono work
9th
62
52
53
10
20
30
40
%
50
60
70
80
Annual Global CEO Survey. All respondents, except Brazil, China, India and Russia (331-674)
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China and India have different comparative advantages
India has strengths in:
- IT skills and technologies
- low cost English speaking staff for offshoring services
- younger population
China has advantages in:
- low cost manufacturing
- higher average education levels
- higher savings and investment rates
Should create potential for mutually beneficial trade
But: also competing for resources to support growth
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Relative competitiveness rankings: China vs India
Country rankings
(out of 117)
China
India
Overall global
competitiveness index
49
50
- Technology sub-index
64
55
- Public institutions
sub-index
56
52
- Macroeconomics
environment sub-index
33
50
Business
competitiveness index
31
57
Source: World Economic Forum Global Competitiveness Report 2005
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Potential impact on OECD companies over next 10 years
Winners
Losers
Retailers
Mass market manufacturers (both low
tech and increasingly hi-tech)
Global brand owners
Business and financial services
Creative industries
Financial services companies not able
to penetrate E7 markets who become
vulnerable at home to E7 entrants
Healthcare and education providers
Companies that over-commit to E7
Niche high value added manufacturers without right local partners and
business strategies
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Potential longer term challenges for Chinese companies
Gradual loss of cost advantages to other emerging markets
Rising input costs (energy, metals etc)
Competition from OECD companies in domestic market as
effects of WTO membership continue to feed through
Overseas investments: choosing the right targets and not
overpaying for them (c.f. Japan)
Moving from technological imitation to innovation
Developing domestic capital markets
Adapting to an ageing labour force
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Public policy issues for China (and other countries)
Danger of protectionist response from US/Europe
Capital market development and banking sector reform
Rural-urban income inequalities (land reform?)
Energy and water supply
Education
Environmental issues
- Domestic: air and water quality, soil erosion, deforestation etc
- Global: challenge of climate change
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Rise of China and India will push up C02 emissions unless
offsetting measures taken to reduce energy/carbon intensity
GtC
25
20
A2 world (low energy
efficiency)
A1 world (moderate
energy efficiency)
B1 world (high energy
efficiency)
15
10
5
0
2005
2025
2050
Source: IPCC scenarios (2000), preliminary PwC model estimates
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Summary
The E7 are coming!
- US, China and India to be three major economies by 2050
- India could actually grow faster than China beyond c.2015
- Brazil, Russia, Indonesia, Mexico and Turkey smaller but also
potentially significant
Potential win-win for the UK and other OECD economies if they
can remain open, flexible and focused on human capital
China and India potential partners as well as rivals
Major public policy challenges … not least climate change
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