The uncertain road to 2025
Two recent publications—one a white paper, another a book—prognosticate about growth in emerging markets over the long term.
In their white paper, Willem Buiter and Ebrahim Rahbari, economists at Citibank, ask the question—“Which countries will drive growth for the next 40 years (from 2010-2050)?” They come up with 11 global growth generators (countries they call 3Gs). Surprisingly, Brazil and Russia do not make it, but two African countries join nine Asian ones on their list. The 11 3Gs according to Buiter and Rahbari are—Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, the Philippines, Sri Lanka, and Vietnam.
In his new book, Reshaping Tomorrow, Ejaz Ghani, economic adviser at the World Bank, discusses the future of South Asian countries looking ahead to the year 2025. His conclusion is in contrast to the optimistic view of Buiter and Rahbari: His is a more pessimistic view that suggests that India will at best be trapped in middle-income status.
Buiter and Rahbari base their view on a set of individual country forecasts of gross domestic product (GDP), per capita GDP, market exchange rates, inflation, last 10 years GDP growth data and a “few centuries of economic research on the drivers of long-term growth”. They construct a 3G index that is primarily made of gross fixed capital formation, gross domestic savings, a measure of human capital aggregating health, education and demographic information, and measures of institutional quality and trade openness. They state that China will overtake the US to become the largest economy in the world by 2020 (at purchasing power parity, or PPP, exchange rates; it would take a decade longer at market exchange rates) and will itself be overtaken by India by 2050. They are less optimistic about Brazil and Russia because a lot of catch-up has already happened, their investment rates are low and the quality of their institutions is poor. Buiter and Rahbari hang their hat on this argument: In a nutshell, all but a handful of nations (such as North Korea, Myanmar, Cuba— all cursed with dysfunctional political and economic regimes) have opened up to international trade and foreign direct investment, have adopted some kind of market economy and have reached the minimum threshold level of institutional quality and political stability that enables them to launch themselves on a path of rapid convergence and catch-up growth.
Ghani’s argument, presented as a compilation of essays, is more nuanced. He is aware that countries will need to make choices and take action in order to continue on a high growth path. Ghani says, “India’s middle-class (daily expenditure of $10-100 in PPP terms) will rise more rapidly compared with that of China, because Indian households will benefit more from growth than Chinese households given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025.” His words of caution come for these reasons, “lopsided spatial transformation, lack of entrepreneurship, large informal sectors, high levels of conflict, gender disparities, and deep pockets of poverty”.
In a similar debate a year ago in the blogosphere, economists Jagdish Bhagwati and Amartya Sen debated the merits of pro-growth versus distributive policies. Bhagwati’s lecture in Parliament at that time, in characteristically blunt language, endorsed strong “Stage 2” reforms. He put continuing trade liberalization in all sectors, reforms in the retail sector and in labour laws as the major components of Stage 2 reforms. Sen, in contrast, has argued for a government focus on health and education allowing growth to take care of itself.
Alas, 2011 was wasted in inaction and redistribution. Increasing income at the individual and national level has to be a prerequisite to distribution. As one short year showed, milking the fruits of reform (and the income it has added) carried out nearly 20 years ago is likely to run out of gas. Follow-on reform, often more difficult because it involves not merely dismantling but making choices, has become an imperative. For instance, balancing rights of tribals and the need for mining on tribal lands (that’s where the mineral and forest wealth is concentrated) is no easy task, but has to be done for us to move ahead. The political tragedy for India is that it is trapped between the rhetoric of “India Shining” of the National Democratic Alliance (NDA) and “India Inclusion” of the United Progressive Alliance (UPA). India is stuck, and only reforms will unglue it from its present position.
Despite powerful secular trends, the path to 2025 for India is not a path of inevitable growth and income generation. As cautionary evidence, Argentina was identified as more promising than the US at the turn of the 20th century. In 1960, Myanmar was considered one of the most promising Asian economies and Singapore did not even exist as a nation-state. Our tryst with destiny will only be met if we continually move forward in policy and action.
PS: “Actions are the seed of fate deeds grow into destiny.” Harry S. Truman.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com
In their white paper, Willem Buiter and Ebrahim Rahbari, economists at Citibank, ask the question—“Which countries will drive growth for the next 40 years (from 2010-2050)?” They come up with 11 global growth generators (countries they call 3Gs). Surprisingly, Brazil and Russia do not make it, but two African countries join nine Asian ones on their list. The 11 3Gs according to Buiter and Rahbari are—Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, the Philippines, Sri Lanka, and Vietnam.
In his new book, Reshaping Tomorrow, Ejaz Ghani, economic adviser at the World Bank, discusses the future of South Asian countries looking ahead to the year 2025. His conclusion is in contrast to the optimistic view of Buiter and Rahbari: His is a more pessimistic view that suggests that India will at best be trapped in middle-income status.
Buiter and Rahbari base their view on a set of individual country forecasts of gross domestic product (GDP), per capita GDP, market exchange rates, inflation, last 10 years GDP growth data and a “few centuries of economic research on the drivers of long-term growth”. They construct a 3G index that is primarily made of gross fixed capital formation, gross domestic savings, a measure of human capital aggregating health, education and demographic information, and measures of institutional quality and trade openness. They state that China will overtake the US to become the largest economy in the world by 2020 (at purchasing power parity, or PPP, exchange rates; it would take a decade longer at market exchange rates) and will itself be overtaken by India by 2050. They are less optimistic about Brazil and Russia because a lot of catch-up has already happened, their investment rates are low and the quality of their institutions is poor. Buiter and Rahbari hang their hat on this argument: In a nutshell, all but a handful of nations (such as North Korea, Myanmar, Cuba— all cursed with dysfunctional political and economic regimes) have opened up to international trade and foreign direct investment, have adopted some kind of market economy and have reached the minimum threshold level of institutional quality and political stability that enables them to launch themselves on a path of rapid convergence and catch-up growth.
Ghani’s argument, presented as a compilation of essays, is more nuanced. He is aware that countries will need to make choices and take action in order to continue on a high growth path. Ghani says, “India’s middle-class (daily expenditure of $10-100 in PPP terms) will rise more rapidly compared with that of China, because Indian households will benefit more from growth than Chinese households given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025.” His words of caution come for these reasons, “lopsided spatial transformation, lack of entrepreneurship, large informal sectors, high levels of conflict, gender disparities, and deep pockets of poverty”.
In a similar debate a year ago in the blogosphere, economists Jagdish Bhagwati and Amartya Sen debated the merits of pro-growth versus distributive policies. Bhagwati’s lecture in Parliament at that time, in characteristically blunt language, endorsed strong “Stage 2” reforms. He put continuing trade liberalization in all sectors, reforms in the retail sector and in labour laws as the major components of Stage 2 reforms. Sen, in contrast, has argued for a government focus on health and education allowing growth to take care of itself.
Alas, 2011 was wasted in inaction and redistribution. Increasing income at the individual and national level has to be a prerequisite to distribution. As one short year showed, milking the fruits of reform (and the income it has added) carried out nearly 20 years ago is likely to run out of gas. Follow-on reform, often more difficult because it involves not merely dismantling but making choices, has become an imperative. For instance, balancing rights of tribals and the need for mining on tribal lands (that’s where the mineral and forest wealth is concentrated) is no easy task, but has to be done for us to move ahead. The political tragedy for India is that it is trapped between the rhetoric of “India Shining” of the National Democratic Alliance (NDA) and “India Inclusion” of the United Progressive Alliance (UPA). India is stuck, and only reforms will unglue it from its present position.
Despite powerful secular trends, the path to 2025 for India is not a path of inevitable growth and income generation. As cautionary evidence, Argentina was identified as more promising than the US at the turn of the 20th century. In 1960, Myanmar was considered one of the most promising Asian economies and Singapore did not even exist as a nation-state. Our tryst with destiny will only be met if we continually move forward in policy and action.
PS: “Actions are the seed of fate deeds grow into destiny.” Harry S. Truman.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com
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