how unique are current times? · further over the next decade even with moderate slowdown in coming...

www.conferenceboard.org© 2010 The Conference Board, Inc. |1

Global Growth and Crises in Historical PerspectiveNovember, 2010

How Unique are Current Times?

Presented byBart van Ark, Chief Economist

http://www.conference-board.org/


Angus Maddison (1926-2010). This presentation is dedicated to Angus Maddison, who was a lifelong scholar in the measurement of long-term economic growth in the world economy, After several decades at

the OECD, Maddison became an economics professor at the University of Groningen (The Netherlands), where he developed a broadly based research program on the sources of growth and development. The most important part of this program was the development of historical measures of GDP and per capita income growth and comparative levels of economic performance. The full set of numbers

Maddison published in Historical Statistics on World Population, GDP and Per Capita GDP 1-2008 AD is available online from his homepage (www.ggdc.net/ maddison). The Conference Board is proud to have inherited one small part of this monumental enterprise in the form of the output and productivity estimates since 1950 that appear in the Total Economy Database (www.conference-board.org/data/economydatabase)



The current shift in global production may be unprecedented

Projections for 2011-2020 suggest faster global GDP growth than 2000-2010 (or even 2000-2008), and not much below 1950-1973

Slow investment, low demand, persistent unemployment, and structural weaknesses will prevent acceleration of growth in advanced economies

Emerging economies will raise their contribution to global growth further over the next decade even with moderate slowdown in coming decade

The shift in global output from 60% (advanced) – 40% (emerging) in 2000 to 40% (advanced) – 60% (emerging) is largest in history

Is a change in “economic leadership” imminent and what can we learn from the past?



Agenda

1. Projections of global GDP growth 2011-2020: methods and ranges

2. How unique are current times?

3. A change in economic leadership?

4. The downside risks and upside potential in the next decade



The Conference Board Global Economic Outlook 2011-2020



The Conference Board Global Economic Outlook 2011-20

Short term (2011) based on The Conference Board Leading Economic Indexes

Medium term (2011-2015) based on measures of output gaps, trends in unemployment and capacity utilization

Long term (2011-2020) based on projections of working age population, assumptions on total factor production and related trends in capital growth.

All informed by evidence from business outlooks and assessment of political-institutional issues that may impact on growth



-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

2006 2007 2008 2009 2010

U.S. (Sep '10)

Euro area (Sep '10)

U.K. (Aug '10)

Germany (Aug '10)

Japan (Aug '10)

6-month percent change (annual rate)

The Conference Board Leading Economic Indexes®Japan(right side)


Source: The Conference Board

The Conference Board Leading Economic Indexes® signal slower, but positive, short-term growth in advanced economies



-32

-28

-24

-20

-16

-12

-8

-4

0

4

8

12

16

20

24

2006 2007 2008 2009 2010

China

Korea

Mexico


The Conference Board Leading Economic Indexes®

Aug '10

Source: The Conference Board

The short-term growth prospects for emerging economies are mixed



high speed

slow speed

medium speed

medium speed

slow speed

Multi-speed growth disparities in 2010 continue into 2011

2010

2011

Projected GDP growth

Source: The Conference Board Global Economic Outlook 2011-2020, preliminary estimates



The closing of the output gap will take time, even if the potential output level itself falls

Sources: CBO, IMF, The Conference Board

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Output gap betweenactual and potential GDP

Percent of potential GDP Projections

Euro 15

U.S.



Required growth to close output gap in U.S. by 2015 is between 3.5 and 4%

Sources: BEA, CBO, The Conference Board

-3

-2

-1

0

1

2

3

4

5

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real GDP growth

Potential output growth

Required growth to close output gap

TCB GDP forecast

Percent Projections



In Europe “required” growth until 2015 is much less due to lower potential output growth rate

Sources: BEA, CBO, The Conference Board

-5

-4

-3

-2

-1

0

1

2

3

4

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real GDP growth

Potential output growth

Required growth to close output gap

TCB GDP forecast

Percent Projections

EU-15



Advanced economies will show weakness in employment and productivity growth

Source: The Conference Board Total Economy Database, September 2010;

*Preliminary estimates of The Conference Board Global Economic Outlook 2011-2020

* * **



Investment remains the main driver in emerging economies but total factor productivity will need to play key role

Source: The Conference Board Total Economy Database, September 2010

* * * *



Sources: 1820-2000: Maddison (2007); 2000-2020 The Conference Board

The 2000-2020 period may become the second fastest growth period in recent history

1820-1870 1870-1913 1913-1950 1950-1973 1973-2000 2000-2020 Western Europe 1.7 2.1 1.2 4.8 2.3 1.3United States 4.2 3.9 2.8 3.9 3.1 1.9Other Advanced 1.0 2.8 2.5 7.5 3.6 2.1 China -0.4 0.6 0.0 4.9 6.8 9.9India 0.4 1.0 0.2 3.5 5.1 8.1Developing Asia 0.9 2.1 1.9 4.6 4.7 5.3Latin America 1.2 3.5 3.4 5.4 3.0 3.6Middle East 0.8 1.4 2.6 7.4 3.4 4.9Africa 0.7 1.3 2.6 4.4 2.9 5.2Eastern Europe 1.4 2.3 0.9 4.9 1.0 3.4Russia and CIS 1.6 2.4 2.1 4.8 -0.6 4.0 World 0.9 2.1 1.8 4.9 3.1 4.0Today's Advanced 1.9 2.6 2.0 4.9 2.9 1.8Today's Emerging 0.4 1.6 1.6 5.0 3.4 6.4

Growth rate of real GDP, 1820-2020



2020*

Shares of world GDP

US EU-15 Other advanced China India Russia and CIS Other emerging

The world economy looks set for a large shift in global distribution of output

*Preliminary estimates of The Conference Board Global Economic Outlook 2011-2020

2000 2010

23

23

16

8

4

4

23


18

18

1416

5

4

2415

13

11

24

8

8

21



Differences with Maddison’s projections to 2030 (Maddison, 2007)

Maddison’s 2003-2030 projection for world GDP growth was 3.2% (2.1% for “rich” and 4.1% for “rest”), about 0.8%-point lower than our estimate from 2000-2020.

OECD revised Maddison estimates upward to 3.5% global growth (1.8% for “rich” and 4.5% for “rest”)

Maddison has a larger GDP share for China (17% of world GDP level in 1990$ vs. 11% in 2005$) and bigger growth deceleration (5% vs. 8.5% growth) and India (6% vs. 8% growth).

It may be reasonable to assume slower growth after 2030, maybe by 0.5%, because of declining catch-up opportunities for emerging economies.

Substantial downside risks to our global outlook may have been partly incorporated in Maddison’s estimates



How unique are current times?



Sources: Maddison (2007), The Conference Board

The 2000s have seen a larger output share in global output from today’s emerging economies

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

1820 1870 1913 1950 1973 2000 2008

GDP

Billion dollars at 1990 price level (using PPP)

Today’ s Advanced1.Western Europe2.North America and Advanced Pacific3.Advanced East Asia

1

2

3

1

2

3

4

Today’ s Emerging1.China2.India3.Eastern Europe and Russia4.Other emerging




Until 1820, what are today’s emerging economies, had by far the largest share in the global economy

0

100

200

300

400

500

600

1 1000 1500 1820

GDP

Billion dollars at 1990 price level (using PPP)

Today’ s Advanced1.Western Europe2.North America and Advanced Pacific3.Advanced East Asia

Today’ s Emerging1.China2.India3.Eastern Europe and Russia4.Other emerging

1

23

1

2

3

4



* 2000-2050 makes conservative assumptions that there will be no further shifts in global output shares after 2020Sources: Maddison (2007), The Conference Board

Period 2000-2020 shows unprecedented change in output shares across major global regions

Alternative measures of changes in global output shares



A change in economic leadership?



Colin Clark, Conditions of Economic Progress, 1940


http://www.amazon.com/gp/reader/0300030797/ref=sib_dp_pt

http://www.amazon.com/gp/reader/0195099028/ref=sib_dp_pt

http://www.amazon.com/Contours-World-Economy-1-2030-Macro-Economic/dp/0199227209/ref=sr_1_1?s=books&ie=UTF8&qid=1288586400&sr=1-1


What is economic leadership and how does it arise?

Economic leadership has two faces (Rostas, 1985):

The relative primacy of a country in commercializing a new technology and establishing a dominant position in a major sector.

The assumption of responsibility for the successful operation of the world economy as a whole

Economic leadership arises from “intensive growth”:

Population growth, more specifically: a rising share of the working age population

A sustainable mix of investment and productivity growth

A pioneering role in technological and institutional innovation



Why did the West arise?

Human capacity to transform forces of nature through rational investigation and systematic experimentation, including rise of universities and the mass use of printing and publishing;

The fostering of entrepreneurship, especially in urban trading centers (Bruges, Venice, etc.);

Reforms of marriage, inheritance, and kinship arrangements to support individualism, accumulation and nation state building

The emergence of a multipolar nation-state system that supported trade, competition, and intellectual exchange.

A gradual evolution of these forces to establish European economic leadership (Maddison-Pomeranz debate)



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1000-1500 1500-1820 1820-1950 1950-2000 2000-2020

U.S.

Western Europe

China

India

Percent

Population growth rates


During periods of intensive growth, population rises…

Maddison estimates




…in conjunction with a rise in per capita income

-1

0

1

2

3

4

5

6

7

8

9

10

1000-1500 1500-1820 1820-1950 1950-2000 2000-2020

U.S.

Western Europe

China

India

Percent

GDP per capita, annual growth ratesMaddison estimates



How does economic leadership erode?

Preconditions for the relative decline of leading world economic powers (Kindleberger, 1996)

Financialization of the economy – and erosion of manufacturing base

Overindebtedness (see also Reinhart and Rogoff, 2008)

Currency debasement

Overdependence of energy

Political corruption and rent seeking

Loss of technological leadership

A falling share in working age population and skill erosion

In other words: “extensive growth”



The risks during the next decade



The downside risk for the global outlook is with emerging economies

Inflationary pressures in emerging markets will be high and drive nominal currency appreciation to effectuate rebalancing

Domestic consumption growth, including services, may dominate trade and investment and slow economic growth

Financial instability risks are high given the large global flows of capital into the immature capital markets of emerging economies

The transition from Investment to productivity as primary driver of growth is more difficult at innovation frontier

The demographic burden of a decline working age population may come too early, in particular for China



50

52

54

56

58

60

62

64

66

68

70

72

1990 1995 2000 2005 2010 2015 2020

China

India

Advancedcountries

Emergingex. China and India

Working age of populationas a percent of total population

Percent IDB projections

China’s demographics will peak this decade, but other emerging markets will continue to see improvements

Sources: The Census Bureau (IDB), The Conference Board



-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-1,500

-1,200

-900

-600

-300

0

300

600

900

1,200

1,500

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

65+ population 40-64 Population15-39 Population 0-14 Population15-39 Growth Rate (RHS) 40-64 Growth Rate (RHS)65+ growth rate (RHS) 0-14 growth rate (RHS)

Working age population (millions)Working age population (millions)

In China aging population and shrinking workforce will add to inflationary pressures longer term

Sources: UN Population Division, World population Prospects: The 2008 Revision, The Conference Board



The “upgrade” of human capital will be one of the biggest challenges for emerging economies

Emerging economies


Advanced economies Percentage of labor force by skill level



The upside potential for advanced economies is to reignite an innovation cycle and to realign with the financial cycle

Supply of debt and equity

1980’s

Recovery / restructuring of banking sector; and moderate increase in

loans

1990’s

Raid growth related to ICT/ solid increase

in debt + equity / ratio

2000’s

Slowdown idue to

saturation; finance

chases less productive

activity;

Shortage of supply over demand pushing up returns; how long and how large the returns will be depends on the shape of this gap

Excess supply of capital over demand; by how much depends on many factors

Demand for finance related to investment and innovation

Financial cycle

S-shaped innovation cycle/phase (Kondratieff)

Case for 1970s-2000s

1970’s

Slow growth & weak finance from retained earning and

equity



The current slow-growth period in the U.S. may have its origins in the prerecession slowdown

Note: Trends were estimated using a Hodrick-Prescott (1997) filter.Sources: BEA, The Conference Board

-8

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Annual percent change from preceding quarter

Real GDPCurrentpre-2010 annual revision pre-2009 comprehensive revision



How much can history tell us about the future?

Topline macro GDP growth estimates can either overstate or understate the dynamics of structural change.

Positive and negative shocks can change the course of action, but mostly play out very, very gradually.

In short term downside risks for emerging economies are large, especially in Asia.

What is nature of economic leadership with average income far below former leaders?

What does greater interconnectivity of the global economy mean for convergence process?


how unique are current times? · further over the next decade even with moderate slowdown in coming...

Documents