The N-11: More Than an Acronym

The N-11: More Than an Acronym April 2007 Salman Ahmed Global Macro & Markets Goldman Sachs, London salman.ahmed@gs.com

BRICs and N-11 2006 Economic Snapshot BRICs and N-11 2006 Economic Snapshot GDP (US$bn) 2001-06 Average GDP Growth Rate (%) GDP Per Capita (US$) Population ( mn) Urbanisation (% Total)* Trade openness (% GDP)* FDI (% GDP)* Current Account (% GDP) Bangladesh 65 5.7 427 144 25.0 36.5 1.1-0.3 6.8 Brazil 1,068 2.3 5,085 187 84.2 22.7 1.7 1.4 4.2 China 2,682 9.8 2,041 1,314 40.5 62.5 3.2 8.6 1.5 Egypt 101 4.2 1,281 72 42.3 56.8 6.4 1.8 7.3 India 909 7.2 696 1,113 28.7 29.3 0.8-2.4 5.6 Indonesia 350 4.8 1,510 222 47.9 51.2 1.9 2.4 13.1 Iran 212 5.7 3,768 70 68.1 52.6 0.0 10.0 14.0 Korea 887 4.5 18,484 48 80.8 68.5 0.9 0.7 2.2 Mexico 851 2.3 7,915 104 76.0 57.4 2.3-0.4 3.6 Nigeria 115 5.6 919 150 48.3 72.3 3.5 15.7 9.4 Pakistan 129 5.3 778 155 34.8 35.5 2.0-3.9 7.9 Philippines 117 5.0 1,314 87 62.6 90.7 1.2 3.1 6.3 Russia 982 6.2 6,908 143 73.3 44.1 1.9 10.3 9.9 Turkey 390 4.6 5,551 73 67.3 51.8 2.7-8.0 10.2 Vietnam 61 7.6 655 84 26.7 128.1 3.8 0.1 7.6 * 2005 data; ** Latest reported Source: IMF, World Bank, UN, GS Inflation (% yoy) 2

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 05 08 11 14 17 20 23 26 29 32 35 38 41 44 47 50 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

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

The Model Entirely Forward-Looking not Extrapolation Y = a K α L 1-α Labour: US Census Bureau forecast for the 15-60 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

What The Model Would Have Said in 1960 Projected average annual GDP growth, 1960-2000 (%) 8 7 6 Actual Predicted 5 4 3 2 1 0 Arg Br Fr Ger HK In It Jp Ko UK US GS BRICs Model Projections. 6

Conservative Growth Forecasts - Solid but Declining % yoy 12.00 Real GDP Growth 10.00 8.00 6.00 4.00 2.00 0.00 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 China India Russia Brazil Pakistan 7

Major Shift in Economic Gravity GDP 2006 US$ bn 140,000 N-11 Catch up with G7, Not BRICs 120,000 100,000 80,000 N-11 BRICs G7 60,000 40,000 20,000 0 Source: GS 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 8

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 1,000 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: GS 9

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

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

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

Growth Environment Score (GES) Index - BRICs in top half of rankings, Pakistan below ave 8 Index 7 6 Overall Index Mean (Developing Countries) 5 4 3 2 1 Korea China Mexico Vietnam Iran Russia Brazil Turkey India Egypt Philippines Indonesia Bangladesh Pakistan 0 Nigeria 13

Pakistan: GES macro stability +; tech, political conditions - Index Pakistan: GES Components 10.0 9.0 8.0 7.0 2006 GES 2005 GES 2006 Mean (Developing) 2005 Mean (Developing) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Inflation Government Deficit External Debt Investment Openness Education Life Expectancy Political Stability Rule of Law Corruption PCs Phones Internet 14

Current GES vs. Comparable Income Groups Index Current GES vs Income Group Stats 10 9 HIC 8 UMC 7 LMC 6 5 4 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 4 3 2 3 2 1 1 0 0 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

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) 3 2 1 Korea Mexico China Russia Iran Vietnam Turkey Brazil India Egypt Philippines Pakistan Indonesia Bangladesh Nigeria 0 16

Pakistan s Per Capita Income 70% Higher under 8% p.a. Scenario Compared to Baseline USD bn 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2050 GDP Under Various Scenarios 2050 GDP (lhs) 2050 GDP Per Capita (rhs) GS Baseline Projection 8.0% 6.8% 5.0% USD terms 14000 12000 10000 8000 6000 4000 2000 0 17

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

Reality Better than Dreams So Far... % 2005-2050 2005-2010 2005 2006 2007 (F) Brazil 3.7 4.0 2.9 3.7 4.0 Russia 2.8 4.5 6.4 6.7 7.0 India 5.6 6.2 7.3 8.8 8.0 China 4.6 7.6 10.2 10.7 10.8 Pakistan** 5.1 5.6 8.6 6.6 6.5 Fiscal Year for India and Pakistan ** IMF WEO Database 19

Domestic Demand and Growth- BRICS More Important than EU 45 40 35 30 25 20 15 10 5 % 2000-2004 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

N-11: A Significant Contribution to Global Growth % 3.5 3.0 2.5 The N-11 Has Contributed Almost 10% to Global Growth Since 2000 2000-2006 Growth Contribution (US$ terms) 2.0 1.5 1.0 0.5 0.0 Korea Mexico Indonesia Turkey Source: GS calculations Iran Philippines Pakistan Egypt Nigeria Vietnam Bangladesh 21

Also Recent Output Growth Performance Has Been Robust % yoy 8 7 6 5 4 3 2 1 0 Bangladesh Egypt Source: IMF, GS Eight of the 11 Have Delivered Higher Real Growth Recently Indonesia Iran Korea Mexico Nigeria Pakistan Philippines 1991-2000 2001-2006 Turkey Vietnam 22

World Trend Growth Rising due to BRICs and N-11? 4.5 % 4.0 3.5 3.0 2.5 2.0 PPP terms Current US$ terms 80 82 84 86 88 90 92 94 96 98 00 02 04 Source: World Bank, GS Calculations 23

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

Young Pakistan s Window of Opportunity

India's Labor Force Dominates the BRICs and Today's G6 By 2030 1200 1000 Labour force, m n 800 600 400 Brazil India Pakistan Germany China Russia Japan US 200 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 US Census projections; GS Economics 26

Labour-force: China Aging Rapidly, India and Pakistan Improve 70 68 66 64 62 60 58 % of total population working age population = share of population aged 15-60 56 Brazil China 54 India Russia 52 G6 Pakistan 50 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 US Census Bureau 27

Population Pyramid Projections Show Increasing Bulge in the Working-Age Brackets Pakistan Population Profile (2006) Pakistan Population Profile (2025) Age Group (Years) 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 8 6 4 2 0 2 4 6 8 Proportion of Total Population % Males Females Age Group (Years) 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Pakistan Population Profile (2050) 6 4 2 0 2 4 6 Proportion of Total Population % Males Females US Census Bureau Age Group (Years) 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Males Females 4 3 2 1 0 1 2 3 4 Proportion of Total Population % 28

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 2006 123 894 669 97 21 37 50 35 76 37 187 2010 129 917 722 93 22 36 50 35 71 37 190 2015 135 920 789 86 22 36 49 34 68 38 192 2020 139 914 852 80 22 35 47 33 67 37 193 2025 140 896 907 76 22 35 44 31 64 36 195 2030 140 867 952 73 22 34 41 29 61 35 201 2035 139 841 988 70 22 33 40 27 56 35 208 2040 136 827 1,018 66 22 33 39 26 52 35 216 2045 132 800 1,042 61 22 32 38 25 49 35 222 2050 128 751 1,059 55 22 32 37 24 47 34 228 Source: US Census Bureau International Database Labour force, mn mn Bangladesh Egypt Indonesia Iran Korea Mexico Nigeria Pakistan Philippines Turkey Vietnam 2006 91 48 145 44 33 66 70 91 53 46 55 2010 97 52 154 48 34 70 77 103 58 49 59 2015 105 57 164 49 34 75 87 118 64 51 63 2020 115 61 172 50 32 78 98 132 69 53 64 2025 126 66 178 51 31 81 111 145 74 53 65 2030 137 69 182 52 29 83 126 157 79 53 66 2035 146 72 184 52 27 84 142 167 82 53 66 2040 153 74 184 51 25 84 160 176 85 51 65 2045 158 75 184 48 23 84 180 182 88 50 63 2050 163 76 184 44 22 83 201 185 90 48 60 Source: US Census Bureau International Database 29

Pakistan s Labor Force Growth Projected to be Higher Than Population Growth Leading to... 3.50 % 3.00 2.50 2.00 1.50 1.00 0.50 Labour Force Growth Population Growth 0.00 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 UN Population Information Network (2006) 30

Fall in Dependency Ratios Over Time 1 Rati o Pakistan's Dependency Ratio Projected to Fall Below 0.5 by 2035 0.9 0.8 0.7 0.6 Dependency Ratio 0.5 0.4 0.3 1950 1975 2000 2025 2050 Source: UN 31

Fall in Dependency Ratio Associated with Rising Savings Rate Falling Dependency Ratio Has Been a Positive for Sav ings Rate % of GDP 20 18 16 14 12 10 8 6 4 2 0 Gross Domestic Savings Dependency Ratio (RHS, inverted) 65% 70% 75% 80% 85% 90% 95% 100% 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 % UN Population Information Network (2006) 32

Stronger Relationship in India s Case % of GDP % 42 48 39 36 33 30 Gross domestic savings Dependency ratio (RHS, inverted) Forecast 52 56 60 27 64 24 68 21 18 72 15 76 12 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 80 UN Population Information Network (2006) 33

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

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 35-60 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

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

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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