Europe as an economic irrelevancy

By 2050 Western Europe could be an economic irrelevancy, with its four leading economies, the UK, Germany, France and Italy (note the order?) enjoying a combined output of less than half India?s and a third of China?s. Both Brazil and Russia will be twice as large as any single Western European economy.

This is the implication of a research report, ?Dreaming with the BRICs? released by US investment bank Goldman Sachs. The report notes that on what it calls reasonable demographic and economic assumptions, the BRICS (Brazil, Russia, India and China) will have a combined GDP larger than the G6 (US, Japan, Germany, the UK and France) by 2050, when China will be the largest economy in the world (having overtaken the US in 2041). As early as 2009 the report expects the annual increase in dollar GDP of the BRICs to outstrip that of the G6.

The growth in relative economic power comes from three sources. First the report expects productivity growth in the BRICS to outstrip the G6 as they ?catch-up? with the leading economies. Second demographics are in their favour (with the partial exception of Russia) as their working-age populations continue to grow quickly. Finally, and importantly, the report expects their exchange rates to appreciate, boosting GDP when measured in US dollars.

The hurt feelings of Americas and West Europeans, used to being in charge, may be soothed by the fact they?ll still be richer than their Chinese or Indian cousins, given in terms of GDP per capita, the G6 economies will maintain a lead, though it will shrink. By 2050 Chinese per capita income is forecast to be 37% of the US level, though it will be over 50% of the UK level and over 60% of French and German. In any case this only suggests that further catch-up (and hence in terms of overall GDP, a larger lead) is possible.

Such startling conclusions are obviously open to debate. Economic forecasts for next quarter are often spectacularly incaccurate, so over decades one would be right to be a little sceptical.

The report acknowledges that its growth assumptions are generally rosy (I?ll leave the debate on the merits of its economic growth model to those more qualified than I), and that for its projections to come true the BRICs must maintain growth friendly policies, which it says are to have sound macroeconomic policies with a stable macroeconomic background, strong and stable political institutions, openness to trade and foreign investment and high levels of education.

With the exception of China (and to a lesser extent India) the BRICs past economic record does not inspire much confidence. Running their models from 1960, to test their forecasting power, GS found that India, Brazil both fell short (as would have Russia) and even in the last few years Brazil in particular has fallen far short of its potential.

Furthermore none of the countries can be said to have had particularly stable and good governance, though at various times some have had stable and some have had good. The risks of major political and social upheaval cannot be discounted in any of them.

So perhaps Goldman Sachs are being a little optimistic, though even on more pessimistic scenarios it is pretty clear that Europe?s relative economic power is on the wane. All the more important therefore to be top dog within Europe, and the report suggests that the UK, due to a combination of better demographics and growth is expected to overtake the German economy in 2036 (not the next ten years, please note), and by 2050 its GDP per capita is forecast to be around 30% higher than France or Germany?s, and 50% higher than in Italy. Is this realistic? Possibly not, as though the demographic case, barring major changes in immigration or birth rates (and soon) is well established, it seems unlikely that such large differences in per capita GDP will occur in such a tightly integrated economic area.

14 thoughts on “Europe as an economic irrelevancy

  1. If the developing world is ever to enjoy comparable standards of living to the developed world, something like this will have to happen, so I don’t see much to feel hurt about. I would think that if standards of living were as high in India as in Germany, that would be a good thing. Much of that GDP growth is likely to be caused by population growth, so living in Europe will still be a good deal nicer than living in India.

    As for the UK overtaking France and Germany… I remember how in the 80’s, there were people predicting that the UK’s GDP per capita would soon fall below Spain’s. Long term forcasts are generally inaccurate in proportion to their specificity. That principle is very effective in assessing horoscopes, and I see no reason to treat Goldman Sachs differently.

  2. Is Russia even growing? Last I looked its GDP was smaller than Chicago Metro’s, and I think the growth numbers have been pretty dismal. Could be wrong though…

  3. All assumes a viable alternative to oil can be found, and that the increasingly opulent lifestyle of these very populous (India and China) countries will not poison the well. I wouldn’t bet on either of those.

  4. I think there are a few trends we can be fairly certain of:

    – Europe’s economic power will decline, in tandem with its population decline and continued statism.
    For instance, both Germany and Russia have such low natural birth rates, their poulation will decline substantially within the next decades.

    http://www.csmonitor.com/2002/0418/p06s02-woeu.html
    http://www.destatis.de/presse/englisch/pm2003/p2300022.htm

    – China’s and India’s ecomonic growth will stagnate as their economies are too heavily based on depressed labor prices and mass manufacturing. Their current GDP rates are contantly overstated, and their static social structure prohibits economic growth beyond a certain point.

    http://www.pitt.edu/~tgrawski/papers2001/gdp912f.pdf

    In 2050, the US status as an economic superpower will be even more substantial in comparison to Europe and Asia.

  5. “In 2050, the US status as an economic superpower will be even more substantial in comparison to Europe and Asia.”

    Not sure about this – the current acount deficit we have now is completely unsustainable, and we’re going to have to have a massive recession in there somewhere before we can get back on track. Check out the Economist’s world economy survey from a couple weeks back.

  6. Johan,
    I see immigration (legit and otherwise) as preventing an actual population decline in Western Europe.

    I don’t see how it’s possible for either China or India to actually stagnate for fifty years in order to make your conclusion possible.

    But if the U.S. wants to be a dominant economic player fifty years from now, it’s going to have to address its current economic problems with something better than the reaganomics currently in vogue at the White House.

  7. Matt – Thank you for bringing this to our attention. In the end, demographic factors will become decisive as suggested but I feel confident we can depend on our great leaders, George W and TB, to take whatever action is necessary to avert this impending threat to national security.

    Rumsfeld is probably already planning the allocations of reconstruction work.

  8. Fantastic example of how GDP-fixation can lead you into absurd conclusions.

    Note that the difference between GDP and GNP is “net income from overseas”. Note also that GNP is much more relevant as a measure both of national living standards and “economic importance”.

    If this scenario pans out, it will happen on the basis of capital investment in the BRIC economies largely financed from overseas. Therefore, by 2050, a very significant proportion of the capital stock of the BRICs will be owned by Europeans and Americans. Therefore, although the GDP of the BRIC economies may show all these favourable trends, under this scenario, a significant proportion of that output will be owned by foreigners.

    John Quiggin has a good line on this; the problem with GDP as a measure of anything useful is that it’s gross (of depreciation and utilisation of nonrenewable resources), it’s domestic (and therefore ignores the importance of capital flows) and it’s a product (measuring outputs while ignoring inputs).

    hmmmm, maybe I need to do a post of my own on this one

  9. If inward investment and foreign ownership of productive assets are such a cause of unmitigated disaster, we must urge dsquared to communicate his insight to the British government at the earliest opportunity and urge that the persistent efforts of the DTI and regional development agencies to attract inward investment should be terminated instantly. Apart from the claimed benefits of keeping out burdensome foreign capital, technology and business executives, there is the prospect of early substantial savings on all that regional assistance offered to inward investing companies which will undoubtedly help IDS fund the tax cuts he is promising.

    Dsquared also needs to quickly tip off poor Denis MacShane, Britain’s minister for Europe, who has been touring the country in his benighted way saying failure to join the Euro is jeopardising inward investment. If MacShane is correct then this must be yet another compelling reason for avoiding the Euro.

    By why stop with Britain? As best I can gather from afar, China’s government in its evidently misguided way has been encouraging inward investment by Taiwanese and Japanese companies. And take Paul Krugman: The Myth of Asia’s Miracle at: http://web.nps.navy.mil/~relooney/fa_11.pdf

    “Consider, in particular, the case of Singapore. Between 1966 and 1990, the Singaporean
    economy grew a remarkable 8.5 percent per annum, three times as fast as the United
    States; per capita income grew at a 6.6 percent rate, roughly doubling every decade. This
    achievement seems to be a kind of economic miracle. But the miracle turns out to have
    been based on perspiration rather than inspiration: Singapore grew through a
    mobilization of resources that would have done Stalin proud. The employed share of the
    population surged from 27 to 51 percent. The educational standards of that work force
    were dramatically upgraded: while in 1966 more than half the workers had no formal
    education at all, by 1990 two-thirds had completed secondary education. Above all, the
    country had made an awesome investment in physical capital: investment as a share of
    output rose from 11 to more than 40 percent.”

    By the citations, Singapore was the massive recipient of inward investment leading, it seems, to all those unwholesome consequences of higher growth in percapita incomes, more employment and better education of its citizens which could have been so easily avoided by the simple expedient of keeping out incoming investment. A few expropriations would have done the trick. How did the Singapore government come to go so wrong?

  10. “will be owned by Europeans and Americans”

    Nice post Bob, I think you have it. I think there is a grave danger of falling into a kind of modern version of the Lenin/Kautsky theory of imperialism. What is the rate of return on capital invested, shall we say 15% to be generous. Then the other 85% of the economic activity is recycled in the receiving country one way or another.

    I think we need to treat this empirically. Look for eg at Taiwan and Hong Kong, who both have ageing populations, a big China investment and ongoing deflation.

    “I don’t see much to feel hurt about”

    I agree with Scott, these changes are in part inevitable and in part just. You can’t be on top all the time. And I also think there is the danger of a kind of implicit racism, feeling that the Indians and the Chinese are incapable of getting their act together, ever.

    “Is Russia even growing”

    Good point, the Eastern ‘transition’ countries all passed through the demographic transition during the communist era. They now have extremely low fertility, ageing populations and EMMIGRATION. The future does not look bright at all for these countries.

    “China’s and India’s…….mass manufacturing……..static social structure”

    Be careful. India’s growth is IT-enabled services lead, China is going to try – Japanese style – for high-end technology, and the social structures are far from static. Anyone doubting how things can change should go and see ‘gangs of New York’ and look at the US twenty years later, strong growth will catalyse the institutional changes.

    Just one gripe. I would fast-forward all this a bit, from say 2050 to 2020. Remember, things are getting faster faster.

  11. “Anyone doubting how things can change should go and see ‘gangs of New York’ and look at the US twenty years later, strong growth will catalyse the institutional changes.”

    It’s never occurred to me before that “The Gangs of New York” actually exhibits an economic growth model. That’s quite an interesting take on it.

    The model would be more complete, though, if they had somehow incorporated the Erie Canal to that story. We had the supply of labor depicted, in terms of the neverending stream of immigrants from Europe, and the conflict engendered with too great a supply of that labor (that conflict, of course, drove most of the drama in the story). But what’s missing is the stream of raw materials and produce that made its way, slowly but surely, from the Midwest, through the Great Lakes into the Erie Canal, which linked to the Hudson River, and finally met all that labor in New York City. That confluence, in the end, made New York City what it is today. Though, of course, the mercantilist bankers also had a lot to do with it….

  12. Markku, we agree for once. I’m astounded!

    The labour, the raw materials, the capital…….and Tammany Hall. And all this gave us the greatest economic power the world has ever seen. And now this is what we have in China (including a Chinese version of Tammany Hall in the form of the CCP), this is my point.

    BTW I wouldn’t take the Golman Sachs numbers too seriously. The demographic projections are much more reliable (although there are still significant uncertainties even here, especially over life expectancy. We know how long a person born in 1920 might reasonably have expected to live, we simply have no serious idea how long a person born in 2000 may live).

    On the GDP side we aren’t even sure what it will be for this year yet, still less for 2004, and once you build out from there the levels of uncertainty become progressively greater.

    I guess in the end we humans are pretty unrealistic. We live in a world where change is a contstant (an accelerating constant) but we like to believe that things have a tendency to stay as they are.

  13. “With the exception of China (and to a lesser extent India) the BRICs past economic record does not inspire much confidence. Running their models from 1960, to test their forecasting power, GS found that India, Brazil both fell short (as would have Russia) and even in the last few years Brazil in particular has fallen far short of its potential.”

    Running a model for India from 1960 (and making predictions based on that) seems a little absurd to me. Right upto 1991, India was experimenting with its version of socialism and liberalization began only in 1991. So using an economic record for the 30 years leading up to 1991 seems a bit silly. It would be more useful to run a model from 1991 to 2003 and see if that economic record inspires any confidence. I suspect it will. No Indian govt since the Rao admin in 1991 has turned its back on actively liberalizing the economy.

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