The N-11: More Than an Acronym

Transcription

1 The N-11: More Than an Acronym April 2007 Salman Ahmed Global Macro & Markets Goldman Sachs, London

2 BRICs and N Economic Snapshot BRICs and N Economic Snapshot GDP (US$bn) Average GDP Growth Rate (%) GDP Per Capita (US$) Population ( mn) Urbanisation (% Total)* Trade openness (% GDP)* FDI (% GDP)* Current Account (% GDP) Bangladesh Brazil 1, , China 2, ,041 1, Egypt , India , Indonesia , Iran , Korea , Mexico , Nigeria Pakistan Philippines , Russia , Turkey , Vietnam * 2005 data; ** Latest reported Source: IMF, World Bank, UN, GS Inflation (% yoy) 2

3 Overtaking the G6: China Moves into Pole Position China Overtaking the G7: When BRICs' and N-11's GDP Would Exceed G7 France Germany Japan US India Canada Italy France UK Germany Japan Brazil Canada Italy France UK Germany Japan Mexico Canada Italy France UK Germany Japan Russia Canada Italy France UK Germany Japan Indonesia Canada Italy France UK Germany Japan Nigeria Canada Italy France Korea Canada Italy Turkey Canada Vietnam Italy Canada Philippines Italy Note: Cars indicate w hen BRICs and N-11 US$GDP exceeds US$GDP in the G7. The N-11 countries not included in the chart do not overtake any of the G7 countries over the projection horizon. Source: GS 3

4 The Projections The motivation: understanding shifts in global growth and spending power The goal: a 50-year roadmap of growth and incomes The model: three elements labour force, investment and productivity catch-up The results: even on conservative assumptions, dramatic change if things go right The risks: conditions for converting potential to reality 4

5 The Model Entirely Forward-Looking not Extrapolation Y = a K α L 1-α Labour: US Census Bureau forecast for the year old (2/3rds share) Capital: Stock less 4% depreciation plus investment (19% -36% of GDP) TFP: Speed of convergence a function of remaining gap to developed world - average 1.3%, but declining Currency Real appreciation = productivity growth gap 5

6 What The Model Would Have Said in 1960 Projected average annual GDP growth, (%) Actual Predicted Arg Br Fr Ger HK In It Jp Ko UK US GS BRICs Model Projections. 6

7 Conservative Growth Forecasts - Solid but Declining % yoy Real GDP Growth China India Russia Brazil Pakistan 7

8 Major Shift in Economic Gravity GDP 2006 US$ bn 140,000 N-11 Catch up with G7, Not BRICs 120, ,000 80,000 N-11 BRICs G7 60,000 40,000 20,000 0 Source: GS

9 BRICs and N-11 would be Key Drivers of Global Demand in the Coming Decades 2006 US$ bn 7,000 6,000 5,000 4,000 N-11 N-11 Incremental Demand Could Be Twice G7 Demand by 2050 BRICs G7 3,000 2,000 1, Source: GS 9

10 The Largest Economies in 2050 including N-11 GDP 2006 US$ bn 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 The World in 2050 China United States India Brazil Mexico Russia Indonesia Japan United Kingdom Germany Nigeria France Korea Turkey Vietnam Canada Philippines Italy Iran Egypt Pakistan Bangladesh 10

11 Wealth in 2050 N-11 and Pakistan Income per Capita in 2050 Mexico Italy Brazil China Turkey Vietnam Iran Indonesia India Egypt Philippines Nigeria Pakistan Bangladesh 2006 US$ 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 The 'rich' club Upper middle income group Lower middle income group Low income group 11 United States Korea United Kingdom Russia Canada France Germany Japan

12 Getting Conditions Right- The Growth Environment Score (GES) Macroeconomic Stability: Inflation; government deficit; external debt Macroeconomic Conditions: Investment rates; openness of the economy Technological Capabilities: Penetration of PCs; phones; internet Human Capital: Education; life expectancy Political Conditions: Political stability; rule of law; corruption 12

13 Growth Environment Score (GES) Index - BRICs in top half of rankings, Pakistan below ave 8 Index 7 6 Overall Index Mean (Developing Countries) Korea China Mexico Vietnam Iran Russia Brazil Turkey India Egypt Philippines Indonesia Bangladesh Pakistan 0 Nigeria 13

14 Pakistan: GES macro stability +; tech, political conditions - Index Pakistan: GES Components GES 2005 GES 2006 Mean (Developing) 2005 Mean (Developing) Inflation Government Deficit External Debt Investment Openness Education Life Expectancy Political Stability Rule of Law Corruption PCs Phones Internet 14

15 Current GES vs. Comparable Income Groups Index Current GES vs Income Group Stats 10 9 HIC 8 UMC 7 LMC Current GES B est in Class Wo rst in Class Class A verage LIC Index GES Moves to 'Best in Class'* 5 HIC UMC LIC LMC Korea Mexico Russia Turkey Brazil Iran China Egypt Indonesia Philippin es Pakistan India Nig eria Vietnam Bangladesh Korea Mexico Russia Turkey Brazil Iran China Egypt Indonesia Philippines Pakistan India Nigeria Vietnam Bangladesh * 'Best in Class' GES - Current GES 15

16 Raising GES Could Help Pakistan s Growth Significantly % yoy 5 4 Growth Premia in the BRICs and N-11 Growth Prem ium from Im proving the GES to 'Best in Class' (annual GDP growth) Korea Mexico China Russia Iran Vietnam Turkey Brazil India Egypt Philippines Pakistan Indonesia Bangladesh Nigeria 0 16

17 Pakistan s Per Capita Income 70% Higher under 8% p.a. Scenario Compared to Baseline USD bn GDP Under Various Scenarios 2050 GDP (lhs) 2050 GDP Per Capita (rhs) GS Baseline Projection 8.0% 6.8% 5.0% USD terms

18 Absolute Size Could be Much Larger If Conditions Improve GDP 2006 US$ bn 12,000 The World in 2050*: Base Case vs Optimistic Convergence Scenario 10,000 8,000 6,000 4,000 2,000 0 B raz il M ex ic o Ru ss ia no place change 3 places Indon esia Nig eria J apan Un ited K ingd om 1 place 4 places 1 place G erm any Fra nce K ore a Turkey V ietn am P hilippines P akis ta n Ca nada E gyp t Ita ly Iran no place change B angla des h * Excludes China, US and India (top three). The chart show s how the w orld w ould look in 2050 if convergence speed in Period 1 increased to 0.8% in Egypt, Philippines and Indonesia, and to 0.6% in Bangladesh, Pakistan and Nigeria 18

19 Reality Better than Dreams So Far... % (F) Brazil Russia India China Pakistan** Fiscal Year for India and Pakistan ** IMF WEO Database 19

20 Domestic Demand and Growth- BRICS More Important than EU % average contribution in current USD terms Domestic demand contribution Growth contribution 0 China Russia India Brazil BRICs US EU-4 Source: World Bank, GS 20

21 N-11: A Significant Contribution to Global Growth % The N-11 Has Contributed Almost 10% to Global Growth Since Growth Contribution (US$ terms) Korea Mexico Indonesia Turkey Source: GS calculations Iran Philippines Pakistan Egypt Nigeria Vietnam Bangladesh 21

22 Also Recent Output Growth Performance Has Been Robust % yoy Bangladesh Egypt Source: IMF, GS Eight of the 11 Have Delivered Higher Real Growth Recently Indonesia Iran Korea Mexico Nigeria Pakistan Philippines Turkey Vietnam 22

23 World Trend Growth Rising due to BRICs and N-11? 4.5 % PPP terms Current US$ terms Source: World Bank, GS Calculations 23

24 Summary: BRICs & N-11 Implications of a Growing Force In less than 40 years, the BRICs & N-11 could be larger than today s G7, with only the US and Japan remaining in top 6. New demand from the BRICs could rival the G6 within a decade, implying changing global consumption and production patterns. The size of the middle-class will mushroom implying sharp increases in demand for consumer durables and energy. 24

25 Young Pakistan s Window of Opportunity

26 India's Labor Force Dominates the BRICs and Today's G6 By Labour force, m n Brazil India Pakistan Germany China Russia Japan US US Census projections; GS Economics 26

27 Labour-force: China Aging Rapidly, India and Pakistan Improve % of total population working age population = share of population aged Brazil China 54 India Russia 52 G6 Pakistan US Census Bureau 27

28 Population Pyramid Projections Show Increasing Bulge in the Working-Age Brackets Pakistan Population Profile (2006) Pakistan Population Profile (2025) Age Group (Years) Proportion of Total Population % Males Females Age Group (Years) Pakistan Population Profile (2050) Proportion of Total Population % Males Females US Census Bureau Age Group (Years) Males Females Proportion of Total Population % 28

29 Pakistan s Working-Age Population Projected to Grow from 91 million Currently to 185 million in 2050 Labour force, mn mn Brazil China India Russia Canada France Germany Italy Japan UK US , , , Source: US Census Bureau International Database Labour force, mn mn Bangladesh Egypt Indonesia Iran Korea Mexico Nigeria Pakistan Philippines Turkey Vietnam Source: US Census Bureau International Database 29

30 Pakistan s Labor Force Growth Projected to be Higher Than Population Growth Leading to % Labour Force Growth Population Growth UN Population Information Network (2006) 30

31 Fall in Dependency Ratios Over Time 1 Rati o Pakistan's Dependency Ratio Projected to Fall Below 0.5 by Dependency Ratio Source: UN 31

32 Fall in Dependency Ratio Associated with Rising Savings Rate Falling Dependency Ratio Has Been a Positive for Sav ings Rate % of GDP Gross Domestic Savings Dependency Ratio (RHS, inverted) 65% 70% 75% 80% 85% 90% 95% 100% % UN Population Information Network (2006) 32

33 Stronger Relationship in India s Case % of GDP % Gross domestic savings Dependency ratio (RHS, inverted) Forecast UN Population Information Network (2006) 33

34 Role of Demographic Dividend in Driving Growth Declining dependency ratios offer potential economic benefits as working-age group tends to earn more relative to it s consumption and therefore contribute more to output and savings Numerous academic studies have identified the role of favourable demographic transition in driving East Asian economic growth (e.g. Bloom et al (1998) ) Positive impact on per capita income due to the increasing share of labor force as productivity improves Falling fertility rates encourages female participation in the labor force 34

35 The Three Main Transmission Channels... N-11 and Pakistan Labor Supply: As demographic transition runs it s course, increasing share of population enters the labor force, especially females, as fertility rates decline Savings: Working-Age population has the potential to earn more relative to it s consumption which promotes savings, thus improving investment rates. This effect is most powerful when share of population in the age bracket rises Human Capital: Creates incentives to build human capital as dynamics such as increase in life expectancy and fewer children come into play 35

36 However, Demographic Dividend is Not Automatic Policy environment is crucial Question of Employability: Strong emphasis on quality, quantity and relevance of education is needed in order to exploit the demographic window of opportunity Gender Angle: Demographic transition sets greater challenges in the case of females. Change in attitude and perception of female s economic role necessary to maximise the gains Health of the Population: Unless, there is improvement in health status of the population increase in labor supply may not lead to productivity improvement 36

37 Conclusions Young Pakistan s demographic profile offers significant source of potential economic benefits High Population argument fails to recognise the potential benefits of changing age structure, as excess workers can be put to work. On the other hand, Demographic Dividend thesis ignores the fact that available workers cannot be automatically absorbed to deliver additional growth However, various strategies (specifically targeting education and health sectors) exist, which can help exploit the opportunity offered by the demographic dividend window Implications for fiscal policy and the role of the government, as both health and education sectors suffer from the public good syndrome 37

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