While we wait for President Obama’s rescue package for the US economy, it may be helpful to recall that there are places in the world where growth looks solid. There are vibrant democratic countries with large economies, young and energetic populations, and growing influence in the world.
The last few years have seen increasing awareness of the importance of emerging markets; but investors and pundits alike have focused on the BRICs – Brazil, Russia, India, and China – as the new sources of the world’s economic growth. However, a focus on the BRICs is already out of date. In half of these countries, demographic patterns have shifted, and the future of the world’s growth now looks set to come from a different set of emerging economies, the TIMBIs: Turkey, India, Mexico, Brazil, and Indonesia.
If we look at projected labor force growth in the world’s dozen leading economies, we see a rather clear division, with the TIMBI countries enjoying growth of 10% to 30% from now up to 2040, while the labor forces of Russia, Europe, Japan, and South Korea will decline by 10% to 30% percent, with only the US among current rich countries growing, and only by about 12 percent.
It is controversial to suggest that China’s enormous growth engine may slow down
or stall. However, some slowing is inevitable. From 1980 to 2010, China’s labor force grew by an average of 1.7% per year, contributing by itself about one-fifth of China’s annual economic growth. Urbanization – a key source of the increase in productivity of China’s labor force, as shifting workers from rural pursuits to urban manufacturing and
services brought huge increases in output per worker – grew at a rate of 4.3%
per year, as urban population went from 20% to 45% of China’s total population. Education – yet another key element in increasing productivity – similarly underwent a rapid boom. From 1998 to 2004, undergraduate enrollment increased from 3.4 to 13.3 million, an annual increase of 25% per year! These trends helped underwrite annual growth rates of 10% per year.
Yet these trends cannot continue at this rate, and indeed have already begun to
reverse. Labor force growth ceased in 2010, and China’s working-age population will decline by 10% by 2040. This shift from 1.7% annual growth to minus 0.35% annual growth will, by itself, assuming all else remains equal, knock two percent of China’s annual growth potential. Moreover, urbanization – perhaps the main driver of productivity increase – will decline even more. The United Nations Population Division projects that China’s urbanization will continue, going from 45% of China’s population today to 67% by 2040, as an additional 360 million people move to the cities. Yet as an annual rate of urban growth, this is only a 1.5% annual increase – a slowdown of about two-thirds from the rate of 1980-2010. And as for educational growth, that has clearly reached a limit.
20 percent of China’s college-age youngsters are in colleges and universities, a remarkable number for what is still a predominantly agrarian and blue-collar economy. China this year announced it will limit the growth of doctoral programs, and the biggest concern of college graduates in China is that their numbers have increased much faster than the economy can employ them, as white-collar jobs are proving extremely hard to find. Thus all the demographic drivers of China’s recent productivity increase will be lacking in the future.
China faces other obstacles as well. Its past reliance on exports to richer countries cannot be sustained as the economies of the U.S., Europe, and Japan undergo what will likely be sustained slowdowns with their aging and stagnating populations. Yet shifting to domestic consumption-driven growth, while already underway, will be a slower process that is unlikely to sustain double-digit growth, since today’s Chinese are – relative to their western counterparts – much more vigorous savers than consumers. In addition, the raw materials to fuel China’s growth will undoubtedly grow more expensive, and increasingly have to be imported.
By contrast, the potential for growth in Turkey, India, Brazil, Indonesia, and Mexico looks far stronger. All of these countries are democratic, have developed strong entrepreneurial cultures, will have continued strong growth in their labor forces, and have great potential to increase education. Of course, they face obstacles as well. Turkey risks running
aground over internal conflicts regarding the role of Islam in society and the role of its large Kurdish minority (about 20% of the population). India faces threats of Hindu-Muslim strife, widespread rural uprisings in the northeast, and vast inequalities among
regions, as well as entrenched local corruption. Brazil faces daunting inequality, both
between its poorer north and more developed south and within its vast cities. Indonesia has still-simmering regional conflicts, and parts of Mexico are near to being overwhelmed by drug violence.
Despite these problems, however, these countries have all turned in strong growth performances over the last decade. And unlike China and Russia, they have demography and freedom – a powerful combination – on their side.
In fact, the current obsession with how soon China’s economy will overtake that of the United States is absurd. In 2010, according to the IMF, China’s economy was the 2nd largest in the world, measured in current US dollars, at $5.74 trillion to $14.62 trillion in the US. However, if China’s growth rate slows down to 5% per year from 2010 to 2030, as seems highly likely given the demographic and other obstacles it faces, and the U.S. economy grows at 2.5% per year (recall that unlike China, the US will still have a growing labor force and advantages in innovation), then in real terms China’s economy will only grow from slightly more than one-third as large as the US today to just over one-half as large in 2030. The US will still have a very comfortable margin in 2030 with a GDP of 24 trillion dollars (in real 2000 US dollars) to China’s GDP of 15 trillion. Since after 2030, China’s workforce will continue to plunge and age at a rapid rate, while that of the US will continue to grow, there is no reason to expect China’s relative gains to continue after that date, but even if those growth rates continue, China’s economy would not draw equal that of the U.S. until after 2050.
The real story of emerging market growth will occur in the TIMBI countries, which will markedly shift their positions in the world economy. We can project the trajectory for the TIMBI countries compared to other leading economies, assuming growth rates of 5% per annum in real terms (measured in 2000 US dollars) in the TIMBI countries and 1.5 % per annum for the U.K., France, Germany, Italy, Russia, and Spain – all countries where the labor force will be rapidly aging and stagnating or shrinking after 2010. (Note that from 1995 to 2005, the rate of productivity growth in western European countries averaged 1.4%, and these countries face substantial austerity and demographic reversals in the immediate future, so even a real growth rate of 2% may be optimistic.)
The big story here is Brazil, overtaking Germany just after 2025 to become the world’s fourth largest economy (after the U.S., China, and Japan). India will overtake Italy in 2020, and surpass France and the UK by 2030, to become the sixth largest economy.
Mexico will overtake Spain and Russia by 2025, and Indonesia and Turkey will essentially catch up to Russia and Spain, going from less than half their size in 2010 to near equality in 2030.
All of the TIMBI countries have diversified economies, with manufacturing, agriculture, and services all growing. Oil exports, which loom so large for Russia and were once crucial to Mexico and Indonesia, no longer play that role. Mexico’s economy grew by 5.1% per year from 1995 to 2002, even as oil dropped from 62% of exports in 1980 to 7% of exports in 2000. Indonesia is now a net oil importer, due to surging domestic consumption
to fuel its own growth.
Turkey is poised to benefit from its position at the fulcrum of Europe, the Middle East, and Africa, resuming its historic central role in Eurasian trade, while also being a huge supplier of goods and services to Central Asia, the Middle East, and Africa. Brazil has not only growing technological skills, but a huge lead in global energy competitiveness through its early adoption of sugar-cane ethanol for fuel, and has still vast reserves of arable land. India’s leap directly to services and economic growth led by white-collar jobs
in information and technology positions it far better than China to ward off competition from other low-wage countries moving into manufacturing, such as Vietnam, Bangladesh, and Indonesia.
In short, China and Russia are very differently positioned for the future, and facing fundamentally different demographic trajectories, than the TIMBIs. So for the next three or four decades, half the BRICs are on the way out – look to the TIMBIs to lead the major surge in global economic growth. Look also for the TIMBIs to assert themselves in global affairs, not only in the G-20 but in all international forums. If the US and China will be competing for global influence, with Europe supporting the former and Russia trying to play a balancing role, the critical swing ‘votes’ in global influence will lie with the TIMBI countries. Collectively, the TIMBIs have one-third more population than China, and their total GDP in PPP terms is already about equal to China’s and will likely grow as fast or faster in the future. Regionally, their global influence spans the Middle East (Turkey), Latin America (Mexico, Brazil), South Asia (India) and Southeast Asia/Pacific (Indonesia). At present, all are increasingly stable democracies. For the critical, pivotal, group of countries in the global economy, and the keys to maintaining global influence for the US and Europe, look to the TIMBIs.
Note: This post is an abbreviated version of my working paper “Out with the BRICs, Time for the TIMBIs”