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Saturday, January 21, 2006

Changes in the Economic Tide

The Economist says that the share of world output coming from developing countries exceeds fifty percent for the first time since the early 1800s, and the share will continue to increase in the future:

Climbing Back, The Economist: Since their industrial revolutions in the 19th century, the rich countries of the “first world” have dominated the global economy. By one measure at least, that era may be over. According to estimates by The Economist, in 2005 the combined output of emerging (or developing) economies rose above half of the global total. This figure has been calculated from the International Monetary Fund's World Economic Outlook database. We ... include the newly industrialised Asian economies (South Korea, Taiwan, Hong Kong and Singapore). These countries might well now be classed as developed, but should surely be counted in any estimate of the long-term success of developing countries. ... We have used the IMF's method of converting national GDPs into dollars using purchasing-power parities (PPPs) instead of market exchange rates. The latter can distort the relative size of economies, not only because currencies fluctuate, but also because prices are lower in poorer economies...

But even when measured by market exchange rates emerging economies are flexing their muscles. Last year, their combined GDP grew in current dollar terms by $1.6 trillion, more than the $1.4 trillion increase of developed economies. And there is more to this than just China and India: these two countries together accounted for only one-fifth of the total increase in emerging economies' GDP last year.

Of course, with half the world's output but five-sixths of its population, emerging economies still have incomes per head far lower than the rich world. But by a wide range of gauges they are looming larger (see chart 1). Their share of exports has jumped to 42%, from 20% in 1970. Over the past five years, they have accounted for more than half of the growth in world exports. Emerging economies are now sitting on two-thirds of the world's foreign-exchange reserves and they consume 47% of the world's oil. On the other hand, their stock markets still account for only 14% of global capitalisation. ...

The growing clout of emerging economies is in fact returning them to the position they held for most of history. Before the steam engine and the power loom gave Britain its industrial lead, today's emerging economies dominated world output. Estimates by Angus Maddison, an economic historian, suggest that in the 18 centuries until 1820 they produced, on average, around 80% of the total. But they were then left behind by Europe's technological revolution. By the early 20th century their share had fallen to 40% (see chart 2). ...

In the past three years, their growth has averaged more than 6%, compared with 2.4% in rich economies. The IMF forecasts that in the next five years they will roll along at just under 6%, twice as fast as developed economies. ...

The future expansion of emerging economies will not follow a straight line. ... However, the long-run prospects for emerging economies as a whole look excellent... Confirmation that emerging economies are grabbing a bigger slice of global output will frighten many people in the rich world. It shouldn't... Emerging economies' spurt is boosting global output, not substituting for growth elsewhere. ...

    Posted by on Saturday, January 21, 2006 at 01:01 AM in Economics | Permalink  TrackBack (0)  Comments (3)


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