STWR - Share The World's Resources

My projections are based on the Mankiw, Romer, and Weil (MRW) interpretation of the Solow Growth model.  The MRW work dates back to 1992 and is one of the best empirical papers of the last twenty years.  Income growth is calculated from national savings rates, labour force growth, and people’s education.  Recent studies indicate that MRW were too cautious in their estimates of how quickly poor countries’ incomes catch up with rich countries’ incomes, and my estimates are a little faster, but still on the cautious side of things.

Let us start with the current largest economy, the United States.  It may sustain its growth in the short term, but looks like it could stagnate in the medium term if the unusually low level of domestic saving adversely affects the potential of the economy.  If the savings rate of 14 percent rises to a more familiar 18 or 19 percent, then production per worker may be expected to stay roughly static or rise slowly, unless a new productivity revolution occurs, or the labour force growth rate declines.  If the labour force growth rate does drop to, say, European levels, then further growth may be anticipated in output per worker as each worker has more capital to use.  The reverse side of the coin is that the national economy would be rather smaller in 2050 if the workforce growth slows down than if it does not.  By 2050, the US economy would be sized around US$13 trillion in today’s money, rather than the $14 trillion it would be, if the workforce continued to grow at 0.8 percent per year.

India has a lower investment rate, a less educated population, and a more rapidly growing workforce than China.  With these characteristics, its individual workers will always have a lower average income than the Chinese.  Nevertheless, much macroeconomics is dictated in the long-run by force of numbers, and India’s billion strong population means that its economy is likely to rival the United States in absolute size by 2060.  Individual workers would still only be earning around US$17,000 on average.  Income would be US$3,000 higher if Chinese levels of education are reached by 2020.

The last century has seen the United Kingdom’s economy overtaken in absolute size by several countries, who adopted its economic system and waited for greater population size to carry them ahead of the former superpower.  China has already passed it, and India will also breeze by in around 2015.  In a sense, the precise geographic incidence of wealth does not matter, since the poor in India, China, and the UK will eventually have a common experience not shared by the rich in their countries.  But country size brings power, and power brings attention here and elsewhere.  The story for individual workers in the UK is similar to United States workers in the medium term: high education, low savings, and moderate income growth potential.  Actually, the UK investment rate is lower than in the US, which accounts for the current discrepancy in incomes between the two future countries, and likely modest future UK growth rates.

For concerned Britons, it is a safe bet that Ethiopia will not overtake the UK in the near future, as it has very low levels of education and one of the lowest starting incomes in the world.  Ethiopia’s investment rates are in fact similar to the UK although unlike the UK it is not mainly funded from domestic saving.  It offers considerable scope for economic growth in the absence of the wars which have poisoned its economy for the last thirty years.  The best estimate of Ethiopia’s growth is that it can sustain growth in real income per capita in excess of six percent until 2015, and growth in excess of four percent until 2030.  Ethiopia in non-war years has been posting growth rates of around these figures since the Marxist government ended in 1991, so it is worth saying that such high growth rates in Ethiopia and elsewhere in Sub-Saharan Africa are not merely rebounds following the end of conflict, nor temporary blips; they are sustainable growth rates indicative of the early stages of economic growth, fully consistent with economic fundamentals in the continent, and fully consistent with the rates observed round the world.  By 2040, Ethiopia would have an income per capita of around US$2000 in today’s money, and a commensurate huge reduction in poverty and its associated problems.  If at that stage Ethiopia educates its population to current Indian standards, adopts a moderate increase in its savings rate to carry it closer to the Indian – not even the Chinese – rate, and lowers its population growth a little, by 2110 it would have an income per person of around US$20,000 and an economy larger than the UK.  The events may not happen but perhaps are as likely as China becoming the world’s leading capitalist power just eighty years after the start of the Great Leap Forward.

Subscribe to this comment's feed

Write comment