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3.3 The Global Economic Forecast for 2030

In October 2003, Goldman Sachs published a report entitled “Dreaming with BRICs: The Path to 2050.” This report predicted that China's GDP would surpass Japan's by 2015, and that, by 2040, it would overtake that of the U.S., becoming the largest in the world; India's economy was predicted to be the same size as Japan's around 2030. The report highlighted the BRICs' economies. In the 10 years since the report was published, China's economic growth has accelerated; its GDP exceeded that of Japan in 2009.

We built a long-term economic growth model for 80 countries to understand how the economic balance between developed and developing nations in the global economy would change. The model did not examine most African nations (only South Africa, Egypt, Algeria, and other larger countries were included) or small island nations; however, it did cover more than 90 % of the world's overall GDP as of 2010 (Motohashi 2014).

Figure 3.3 shows the 2030 forecast of GDP shares (in US dollars) by country and region, based on this model. The share held by the developed nations (Japan, North American countries, and Western European countries) was about 85 % until 1990. This percentage began to shrink in 2000 and is expected to drop to almost 40 % by 2030. Japan's share of the global economy was 15 % until 2000, but will contract to less than 5 % in 2030. Japan's position in the global economy will become marginal. On the other hand, China's share will grow to approximately 18 % by 2030, and India's will increase to about 6 %. The shares of Brazil and other Latin American countries, Russia and other Eastern European/Eurasian countries, and Middle

Fig. 3.3 Changes in shares of GDP (in nominal U.S. dollars)

Eastern and African countries will grow. These estimates also show that by 2030, China's GDP will be as large as that of the U.S., and India's GDP will surpass Japan's.

These estimates were generated by reverse-engineering of calculations for growth factors, i.e., by forecasting investments in labor and capital, and then adding total factor productivity (TFP) to calculate potential economic growth. When forecasting long-term economic growth, it is important to factor in changes in the composition of the population. As a simple explanation of our model structure, we first determine investment in labor by forecasting the future working-age population (those between 20 and 65 years of age) using UN population estimates. For capital stock, we subtract depreciation from the starting point (2010) for future projections, and then add new equipment investment to determine next-period capital stock (the perpetual inventory method). Repeating these steps enables us to determine the path of capital accumulation. Equipment investment is determined by the savings rate (the I–S balance), and the savings rate is affected by the ratio of elderly people in the population (or the ratio of elderly to working-age individuals). This is because an aging society increases consumption in society overall, and lowers the savings rate. Furthermore, total factor productivity (TFP) is set to an annual rate of 1 % for all countries. While it may be possible to use past trends in the TFP of each country, we set our baseline at a certain value due to issues with the accuracy of our statistical data, and then adjusted this value by country and period as necessary. Even if we were to set the post-2010 TFP growth rate to 2 % rather than 1 % for Japan alone, the share of Japan's GDP would only rise by 1.2 %, i.e., from 4.3 to 5.5 %. Furthermore, it is rare for a country to have an average long-term TFP growth rate of more than 2 %, and it is hard to imagine that political instability, i.e., wars, or other large external shocks causing negative TFP would not occur. Accordingly, any assumptions we made on TFP are not likely to have much of a negative impact on the accuracy of the results of our forecast.

In “The World Is Flat,” Thomas Friedman discussed the notion that the world is becoming “flatter,” with less awareness of national borders due to internet-based innovations and negotiated trade via the WTO or FTAs (free trade agreements) and EPAs (economic partnership agreements). To be sure, when one visits the campus of Infosys in Bangalore, India, the subject of the beginning of the book, one does get a sense of this “flattening.” The campus is located in a beautiful park-like complex, replete with modern buildings. The company's many engineers provide IT services primarily to Western companies. The department that offers maintenance services for remote computers, work the same hours as their clients. Thus, people in India work in the time zones of eastern U.S. as well as the European continent. The power of the internet allows people to experience such a flattened world.

However, when Infosys employees step off their corporate campus, they are greeted with the roadside stalls and motorized rickshaws that are common in India. Sales per capita at Infosys is less than one-tenth that of IBM. Compared with the U.S., wages in India are very low. Of course, the rise of Infosys and other Indian IT companies puts downward pressure on U.S. software engineers' compensation.

Fig. 3.4 Changes in per capita GDP

However, because of restrictions on trans-border migration the labor markets of India and U.S. will never be consolidated. The world is, perhaps, becoming flatter, but it is a long way from being flat.

The GDPs of China, India, and other developing nations are growing, and the developed nation-centric global economic structure appears to be changing. At the same time, income levels in developing nations are rising. Will they catch up to the developed nations? If they do, then the world will truly be flat. In Fig. 3.4, we note that, at least through 2030, the developed-versus-developing picture will remain unchanged. In this section, we focus on changes to per capita GDP and identify two distinct groups: the developed nations of North America, Western Europe, Japan, and the NIEs (South Korea, Taiwan, Singapore, and Hong Kong); and the developing nations of China, India, Latin America, Eastern Europe/Eurasia, the Middle East, and Africa. By 2030, the per capita GDP of Latin America will be approximately $30,000, and that of China will rise to about $20,000. These are in nominal terms. When we consider inflation, these levels will still not equal those of the developed nations.

While such differences between developed and developing nations will prevail, developing nations will have a greater economic presence. From the perspective of Japanese corporations, the global strategy till date has entailed expansion in western nations with economic environments similar to Japan's. Having achieved that goal, companies then expanded into lower-ranked developing economies, although on a smaller scale. In the future, however, companies must aim their strategic focus on developing countries, particularly newly developed countries experiencing high growth.

A brief comment on the trend in Japan's per capita GDP: until 2010, Japan's per capita GDP was as high as that of the U.S., but by 2030 this gap is expected to increase, and Japan's per capita GDP will be in a par with those of Western Europe and the NIEs. Japan's relative decline among the developed nations is due to its aging population. The working-age population will decline as a percentage of the overall population, and this will bring down the per capita productivity. In addition, the aging society will lead to a decline in the savings rate, along with a deceleration in the rate of capital accumulation as equipment investment contracts. Japan's elderly (those 65 and older) in 2010 comprised just under 40 % of the population. This will increase to more than 50 % by 2020, and almost 60 % by 2030. Population aging is seen in all developed nations, although the ratio of the elderly in the populations of Europe, North America, and the NIEs will all average around 40 %. Thus, the aging rate in Japan is extraordinarily high even among developed nations and, accordingly, GDP growth will be slower in Japan than in other countries.

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