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Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment Tel Aviv December 2009 New Alignments in the Global Economic Balance of Power The INSEAD – Israel Research Center
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Transcript of Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment Tel...
Ilian MihovProfessor of Economics
Novartis Chaired Professor of Management and the Environment
Tel AvivDecember 2009
New Alignments in the
Global Economic Balance of Power
The INSEAD – Israel Research Center
Production (GDP, 2008). Measured in USD (PPP). World = USD 69.7 Trillion
How is GDP at PPP calculated?
By using international prices: PAUS
*QA + POUS
*QO + … Source: World Bank (World Development Indicators, 2008)
Measuring GDP Across Countries
Total World Population (2007): 6.6 Billion
What if the poor countries become rich? What will be the size of each economy? If every country has the same income per capita, then the size will be determined by population.
Is it happening?
How Big Are World Economies?(according to population)
time
Inco
me p
.c.
Note: The graph shows the percentage of world GDP produced by each country or region. The projection for 2015 uses growth assumptions, which are close to recent long-term growth rate estimates Advanced economies 3%, China 10%, India 7.3%, World 5%. Source: WDI (2008).
Distribution of World Output (PPP)
0%
25%
50%
75%
100%
1975 1985 1995 2005 2015
USA Other rich China India Rest of the world
62%Advanced:49%
Emerging:51%
2010
Log scale. Source: Jones (1995) and WDI (2009)
Characterizing Growth over 130 YearsUS Real GDP per Capita
Log scale. Source: Jones (1995) and WDI (2009)
Forecasting 80 Years AheadUS Real GDP per Capita
1. Put yourself in 1928. You have data for income per capita since 1870 and have been asked to forecast income per capita in the year 2008.
2. Fit a trend that assumes a constant growth rate
3. If you use the fitted trend to forecast US income per capita, you will find that it will multiply by a factor of 4 and will reach $47,401 in 2008
Log scale. Source: Jones (1995) and WDI (2009)
Forecasting 80 Years AheadUS Real GDP per Capita
Check how well you did. Forecast: $47,401 Actual: $46,716 An error of $685 (or 1.47%) !!!!!
Forecasting 80 Years AheadUS Real GDP per Capita
Real G
DP P
C
Log scale. Source: Jones (1995) and WDI (2009)
Industrialization Railroads
The Depression of the 1890s
World War I
World War II
The Great Depression
Oil Shocks
“New Economy”
Constant growth (1.85%),
but based on continuous effort to innovate, to
improve processes, and bounce back after shocks
1981 monetary contraction
Convergence
UK
JapanItaly
FranceGermany
US
Canada
Will we all be rich soon?
Growth Miracles and Growth DisastersAverage annual growth rates of GDP per capita (1960-2007)
Miracles Growth Disasters Growth
Botswana 6.36 C. Afr. Rep -1.24
Korea 6.01 Niger -1.23
China 5.90 Djibouti -1.16
Singapore 5.49 Haiti -1.10
Thailand 4.43 Madagascar -0.84
Ireland 4.01 Zambia -0.49
Malaysia 3.79 Comoros -0.40
Japan 3.71 Nicaragua -0.09
Spain 3.54 Venezuela 0.05
Some countries converge, others remain poor. Why?
L.Chelvin
Data for average growth updated to 1960-2005.X-axis now refers to average gross fixed capital formation (% of GDP) [not sure the source of the prev. series on ave. investment in fixed capital]File name: WEF Session_data(data found in wksheet named Capital formation_WDI)
Some countries converge, others remain poor. Why?
US capital: $1292
US capital and labor: $4006
Productivity
Institutions
L.Chelvin
Data for average growth updated to 1960-2005.X-axis now refers to average gross fixed capital formation (% of GDP) [not sure the source of the prev. series on ave. investment in fixed capital]File name: WEF Session_data(data found in wksheet named Capital formation_WDI)
GDP per capita (constant dollars)
9
10
10
11
1975 1980 1985 1990 1995 2000 2005
Singapore Venezuela USA
7500
15000
60000
30000
Asia-Pacific High-Potential Countries
6
7
8
8
9
10
10
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
US
Malaysia
Indonesia
India
Sri Lanka
Philippines
China
Vietnam
Thailand
32000
16000
8000
4000
2000
1000
500
Institutions and Income
Income per capita
Poor Rich
Insti
tuti
on
al q
uality
Bad inst
itu
tions
Good inst
ituti
ons
The Great Wall: Institutions and income per capita (2007)
-2
-1
0
1
2
640032001600800 12800 25600 51200
Inst
itut
iona
l qua
lity
Income per capita (2007)
USA
Saudi Arabia
China
Oil producing countries
Rule of lawControl of corruption
Voice and accountability Political stability
Government effectiveness Regulatory quality
The Role of Institutions
The Great Wall: Institutions and income per capita (2007)
-2
-1
0
1
2
640032001600800 12800 25600 51200
Inst
itut
iona
l qua
lity
Income per capita (2007)
USA
Saudi Arabia
China
Rule of lawControl of corruption
Voice and accountability Political stability
Government effectiveness Regulatory quality
The Role of Institutions
Balance of Power
The shift of economic power started in the past one or two decades.
Opportunities: Very high growth and high potential for emerging markets.
Will growth continue? Challenges:
Continued regulatory and institutional reform
Unravelling of global imbalances. The global financial crisis may temporarily reduce the speed of convergence.
Shift in the global economic power requires that more responsibility for good policy management falls on the shoulders of China, India, Russia and the other fast growing countries in the world. Inflation risks.
