Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment Tel Aviv December 2009 New Alignments in the Global Economic Balance of Power The INSEAD – Israel Research Center

Production (GDP, 2008). Measured in USD (PPP). World = USD 69.7 Trillion How is GDP at PPP calculated? By using international prices: P A US * Q A + P O US * Q O + … Source: World Bank (World Development Indicators, 2008) Measuring GDP Across Countries

Total World Population (2007): 6.6 Billion 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? How Big Are World Economies? (according to population) time Income p.c.

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). Distribution of World Output (PPP) 62% Advanced: 49% Emerging: 51% 2010

Log scale. Source: Jones (1995) and WDI (2009) Characterizing Growth over 130 Years US Real GDP per Capita

Log scale. Source: Jones (1995) and WDI (2009) Forecasting 80 Years Ahead US Real GDP per Capita 1. Put yourself in You have data for income per capita since 1870 and have been asked to forecast income per capita in the year Fit a trend that assumes a constant growth rate 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

Log scale. Source: Jones (1995) and WDI (2009) Forecasting 80 Years Ahead US Real GDP per Capita Check how well you did. Forecast: $47,401 Actual: $46,716 An error of $685 (or 1.47%) !!!!!

Forecasting 80 Years Ahead US Real GDP per Capita Real GDP PC Log scale. Source: Jones (1995) and WDI (2009) IndustrializationRailroads The Depression of the 1890s World War I World War II The Great Depression Oil Shocks “New Economy” Constant growth (1.85%), but based on continuous effort to innovate, to improve processes, and bounce back after shocks 1981 monetary contraction

Convergence UK Japan Italy France Germany US Canada

Will we all be rich soon?

Growth Miracles and Growth Disasters Average annual growth rates of GDP per capita ( ) MiraclesGrowthDisastersGrowth Botswana6.36C. Afr. Rep-1.24 Korea6.01Niger-1.23 China5.90Djibouti-1.16 Singapore5.49Haiti-1.10 Thailand4.43Madagascar-0.84 Ireland4.01Zambia-0.49 Malaysia3.79Comoros-0.40 Japan3.71Nicaragua-0.09 Spain3.54Venezuela 0.05

Some countries converge, others remain poor. Why?

US capital: $1292 US capital and labor: $4006 Productivity Institutions

Asia-Pacific High-Potential Countries US Malaysia Indonesia India Sri Lanka Philippines China Vietnam Thailand

Institutions and Income Income per capita Poor Rich Institutional quality Bad institutions Good institutions

Oil producing countries Rule of law Control of corruption Voice and accountability Political stability Government effectiveness Regulatory quality The Role of Institutions

Rule of law Control of corruption Voice and accountability Political stability Government effectiveness Regulatory quality The Role of Institutions

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.

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