November 11, 2012
We all know that 2016 will be an auspicious date for Ireland. But it will also be an important date for the world. Yesterday, the OECD announced that the Chinese economy is set to overtake the US by 2016. Indeed, by the end of this year, China will have overtaken the eurozone economy.
Bearing this in mind, arguably the more significant power struggle was not the one between Obama and Romney last week, but the handover of power – the coronation, if you will – taking place this weekend in China. In relative terms, even though the US is recovering from the disaster of the Bush/Greenspan years, and despite the fact that Obama won the election because of – not in spite of – the economy, the big issue is now managing the relative decline of the US in tandem with the relative ascendance of China and – not too far behind – India.
Last week, the OECD produced some interesting long-range forecasts that are worth highlighting since, although it’s easy to get bogged down in the ground war of Europe, bank debt, the budget and the immediate next move in the economy, taking a bit of altitude is always necessary. Have a look at the charts.
Last year, the US accounted for 23 per cent of the world’s GDP while the euro area accounted for 17 per cent. China also accounted for 17 per cent. India, with its billion-plus population, was at a mere 7 per cent. However, by 2060, China will achieve 28 per cent of total world GDP while India will account for 18 per cent. In direct contrast, the influence, power and weight of the US and Europe will have progressively diminished. By the time my own children are moving towards pensionable age, the US – formerly the world’s leader, don’t forget – will account for a modest 17 per cent of the world’s economy. Europe, once the master of all she surveyed, will slip to a practically irrelevant 9 per cent of total world income.
These are enormous changes. While not unprecedented (all great empires and powers tend to peak, overreach and fall back in the great Darwinian game of global economic history), these trajectories are significant and quite immediate. By this I mean that, though 2060 seems like a long way away, it is really only 48 years. Perhaps you remember 1965, 1966 or 1967? If you do, it mightn’t seem so long ago either; it was after JFK was assassinated and before the first man on the moon: the era of Mohammed Ali and Martin Luther King; the years of Revolver and Sergeant Pepper; and the glory days of Matt Busby, George Best and, of course, Celtic FC.
Back then, America was the main player and, despite everything, it’s still top dog today. Imagine the coming change: seeing American power diminish to such an extent that it will be smaller than India is today
on the world stage.
If we stick with the economics, we see that three factors affect the long-term growth rate of any economy. The first is the most significant. It has been said that “demography is destiny” and this is true. The countries with the highest population growth tend to dominate in the long run because they have enough people to work and to consume the fruits of their labour. The other factor affecting demography is the education level of those people. The better educated and better trained the population, the more productive they’re likely to be.
The second major factor determining the growth rate of any country is technology or capital. The more capital-intensive the country, the more productive and richer it will be. Look at the enormous productivity of Ireland’s multinational sector. This output per employee has driven the phenomenal capital intensity of the manufacturing bases. We see it all over the world: when you have smart people and lots of capital, growth rates go through the roof.
The final piece of economic alchemy is what economists call total factor productivity. This is how productive the country is when you combine the people and the capital. This is the great chemistry of growth economics; above all, this figure tells you if the economy is doing the right things. It is quite distinctive from the growth rate.
We know in Ireland that, if you throw enough money at an economy, it is easy to get growth rates that seem marvellous but they have as much durability as a blazing, open fire. It’s fired up by reams of paper, which looks great, but gives off no heat and will ultimately burn itself out.
Famously, in the mid-1990s, Paul Krugman spotted something odd about the Asian miracle: there wasn’t one. He noticed total factor productivity in Asia was actually falling. Therefore, the vaunted growth rates were fuelled either by too many people being crammed into the economy, or by too much cash being smart.
But neither the people nor the deployed capital was productive, so he said the boom in the Asian Tigers would come to a sudden stop – which it did.
Getting the total factor productivity usually depends on having the right institutions, laws, rules and infrastructure – which allow people and capital to work together seamlessly. This is the key to why the northern European countries have been able to continue paying themselves well and still keep ahead of the rest: they are well organised and have strong institutions, backed by a strong commercial culture.
As the rest of the world develops, they will need these strong institutions; they will need to import western technology and copy it. The education of their people will be essential. And this is where our
Last week atÂ www.kilkenomics.com, two eminent Indian economists and financial market players – PK Basu and Vikas Nath – shared stories about being taught by Irish priests in India in the 1970s. They enthused about how many prominent Indians were bonded by having been educated by Irish orders and how this is a huge unifying brand that Ireland has in the sub-continent. Looking ahead, they urged Ireland to reach out to the children of similar Indians, build on a strong teaching brand and they insisted that, if we opened up our education system to the children of the emerging Indian middle-class, we would have a growth industry to beat any other.
They argued that we could be the host nation for an education revolution that would see thousands of rich Indians come here to learn. They believed, based on their own experiences, that this would be pushing an open door – to another English-speaking country which they had a positive collective impression of, and relationship with: Ireland. Years ago, I spoke of plugging into our diaspora (and it’s nice to see it being acted on, finally). I spoke about leveraging from our history and making the most of our global footprint.
Many assumed this was just talking about reconnecting with the ethnic Irish abroad and, granted, it was the main message. But the Irish experience abroad, the Irish voice – the Irish echo – is far more than the genetically Irish. It lives on as much in the heads and hearts of Hindu Indians as it does in those of Harlem Catholics – and it can be tapped. Look again at the world in 2060 and our place in it. It could well be an evergreen harvest that might well be ‘gathered’, year in, year out.