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The INSEAD – Israel Research Center
New Alignments in the
Global Economic Balance of Power
Ilian Mihov
Professor of Economics
Novartis Chaired Professor of Management and the Environment
Tel Aviv
December 2009
Measuring GDP Across Countries
Production (GDP, 2008). Measured in USD (PPP). World = USD 69.7 Trillion
How is GDP at PPP calculated?
By using international prices: PAUS*QA + POUS*QO + …
Source: World Bank (World Development Indicators, 2008)
How Big Are World Economies?
Total World Population (2007): 6.6 Billion
Income p.c.
(according to population)
time
What if the poor
countries become rich?
What will be the size of
each economy? If every
country has the same
income per capita, then
the size will be determined
by population.
Is it happening?
Distribution of World Output (PPP)
Emerging:
51%
100%
75%
50%
62%
Advanced:
49%
25%
0%
1975
USA
1985
Other rich
1995
China
2005
India
2010 2015
Rest of the world
Note: The graph shows the percentage of world GDP produced by each country or region.
The projection for 2015 uses growth assumptions, which are close to recent long-term growth rate estimates
Advanced economies 3%, China 10%, India 7.3%, World 5%. Source: WDI (2008).
Characterizing Growth over 130 Years
US Real GDP per Capita
5990011
22000
10
8100
9
3000
8
1870
1878
1886
1894
1902
1910
1918
1926
1934
1942
1950
1958
1966
1974
1982
1990
1998
2006
Year
Log scale. Source: Jones (1995) and WDI (2009)
Forecasting 80 Years Ahead
US Real GDP per Capita
3. If you use the fitted trend to
forecast US income per capita, you
will find that it will multiply by a
factor of 4 and will reach $47,401
in 2008
59900
11
1. Put yourself in 1928. You have
data for income per capita since
1870 and have been asked to
forecast income per capita in the
year 2008.
22000
10
8100
9
2. Fit a trend that
assumes a constant
growth rate
3000
8
1870
1878
1886
1894
1902
1910
1918
1926
1934
1942
1950
1958
1966
1974
1982
1990
1998
2006
Year
Log scale. Source: Jones (1995) and WDI (2009)
Forecasting 80 Years Ahead
US Real GDP per Capita
59900 11
22000
Check how well you did.
Forecast: $47,401
Actual: $46,716
An error of $685 (or
1.47%) !!!!!
10
8100
9
3000
8
1870
1878
1886
1894
1902
1910
1918
1926
1934
1942
1950
1958
1966
1974
1982
1990
1998
2006
Year
Log scale. Source: Jones (1995) and WDI (2009)
Forecasting 80 Years Ahead
US Real GDP per Capita
“New Economy”
59900
11
1981 monetary
contraction
World War II
Real GDP PC
22000
10
World War I
Constant growth
(1.85%),
but based on
continuous effort to
innovate, to
improve processes,
and bounce back
after shocks
Oil Shocks
Industrialization
8100
Railroads
9
The Depression of the
1890s
3000
8
1870
1878
1886
1894
1902
1910
1918
1926
The Great Depression
1934
1942
1950
1958
1966
1974
1982
1990
1998
2006
Year
Log scale. Source: Jones (1995) and WDI (2009)
Convergence
US
UK
Germany
France
Canada
Italy
Japan
Will we all be rich soon?
Real GDP Per Capita
10
Japan
USA
Argentina
Brazil
India
China
5
1900
1907
1914
1921
1928
1935
1942
1949
1956
1963
1970
1977
1984
1991
1998
2005
Growth Miracles and Growth Disasters
Average annual growth rates of GDP per capita (1960-2007)
Miracles
Growth
Disasters
Growth
Botswana
6.36
C. Afr. Rep
-1.24
Korea
6.01
Niger
-1.23
China
5.90
Djibouti
-1.16
Singapore
5.49
Haiti
-1.10
Thailand
4.43
Madagascar
-0.84
Ireland
4.01
Zambia
-0.49
Malaysia
3.79
Comoros
-0.40
Japan
3.71
Nicaragua
-0.09
Spain
3.54
Venezuela
0.05
Some countries converge, others remain poor. Why?
Income per capita in 1988 (PPP, $)
35000
30000
25000
20000
15000
10000
5000
0
Income per capita
USA
Niger
30851
862
Some countries converge, others remain poor. Why?
Income per capita in 1988 (PPP, $)
35000
30000
25000
Productivity
20000
Institutions
15000
10000
US capital and labor:
$4006
5000
US capital: $1292
0
USA
Niger
GDP per capita (constant dollars)
60000
11
30000
10
15000
10
75009
1975
1980
1985
Singapore
1990
1995
Venezuela
2000
2005
USA
Asia-Pacific High-Potential Countries
US
32000
10
16000
10
80009
Malaysia
Philippines
40008
Thailand
Indonesia
Sri Lanka
20008
Vietnam
7
1000
India
China
5006
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Bad institutions
Good institutions
Institutional quality
Institutions and Income
Poor
Rich
Income per capita
The Role of Institutions
Voice and accountability
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption
The Great Wall: Institutions and income per capita (2007)
Institutional quality
2
USA
1
0
Saudi Arabia
-1
China
-2
800
1600
3200
6400
12800
Income per capita (2007)
Oil producing countries
25600
51200
The Role of Institutions
Voice and accountability
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption
The Great Wall: Institutions and income per capita (2007)
Institutional quality
2
USA
1
0
Saudi Arabia
-1
China
-2
800
1600
3200
6400
12800
Income per capita (2007)
25600
51200
Balance of Power
 The shift of economic power started in the past one or two decades.
 Opportunities: Very high growth and high potential for emerging markets.
 Will growth continue? Challenges:
 Continued regulatory and institutional reform
 Unravelling of global imbalances. The global financial crisis
may temporarily reduce the speed of convergence.
 Shift in the global economic power requires that more responsibility
for good policy management falls on the shoulders of China,
India, Russia and the other fast growing countries in the world.
Inflation risks.
Thanks
“The INSEAD Israel Research Center”
&