The Implications of Goldman Sachs's Forecast for Economies and Firms - Article Example

The Implication of Goldman Sachs’s Forecast for BRIC Economies and Firms within the Triad Introduction Economically, politically and militarily, theUnited States (US) is the dominant force in contemporary world affairs (Anderson et al. 2000, p.25). Anderson et al. state that the US economic influence extends far beyond its status as the world’s largest economy. The US is progressively, in the words of one observer, ‘creating an economic world in its own image’ (2000, p.25). The unprecedented metamorphosis of Japan from a defeated nation to an economic superpower in the past fifty years and an annual increase in gross domestic product (GDP) of about 10% per annum until the 1990s represent a stunning achievement for the Japanese (Anderson et al. 2000, p.42). In stark contrast to the position in the United States, the Japanese economic ‘miracle’ has been founded on principles completely alien to classic economic theory. Where the free play of market forces dictates vigorous competition, the Japanese economy is managed on the basis of consensus; where the Anglo-American model prescribes minimal government intervention, the Japanese economy flourished precisely because the state has intervened massively to safeguard domestic markets from foreign competition and to support the establishment, growth and export potential of key industry sectors, including the advanced technology sectors. If the break-up of the Soviet Union constitutes the most dramatic development of the post—Second World war era, arguably the most significant has been the gradual but steady evolution of the European integration (Anderson et al. 2000, p.62). The establishment of the European single market in January 1993 superseded the laws of the first 12 member states and it has been estimated that 60 million border-crossing regulations were abolished. As of 1996, the total 15 country GDP had increased by some $150 billion and employment rose by some 300,000-900,000 (Anderson et al. 2000, p.64). Unfortunately, as Goldman Sachs put it, these three of the world’s largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (in terms of income per capita), making strategic choices for firms more complex. Over the next 50 years, Brazil, Russia, India and China—the BRICs economies—could become a much larger force in the world economy. If things go right, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025 they could account for over half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050 (Wilson and Purushothaman 2003, p.1). This article briefly presents the implications BRIC countries have to face if they are to realize Goldman Sachs’ prediction by 2050. this article will also deal on some of the BRICs’ potential that would aid them to be the next economic superpowers. The Context of BRIC Countries Wilson and Purushothaman (2003, p.4) state that the progress of the BRICs will be critical to how the world economy evolves. If these economies can fulfill their potential for growth, they could become a dominant force in generating spending growth over the next few decades. Another characteristic of the BRIC countries’ economic development is that generally their economic growth has fluctuated more strongly than has been the case for the developed countries. This tendency magnifies the significance of the BRIC countries to the global economy, since the fluctuations in their growth explain a relatively larger share of the global cyclical fluctuations than their economic weight would indicate (Jensen and Larsen 2004). Taking each of the BRIC economies briefly, the following are the implications that each country would experience if they are to attain the Goldman Sachs’ prediction: Brazil. Over the next 50 years, Brazil’s GDP growth rate will average by 3.6%. The size of Brazil’s economy will overtake Italy by 2025; France by 2031; UK and Germany by 2036 (Wilson and Purushothaman 2003, p.10). China. China’s GDP growth rate will fall to 5% in 2020 from its 8.1% growth rate projected for 2003. By the mid-2040s, growth will slow down to around 3.5%. Even so, high investment rates, a large labor force and steady convergence would mean China would become the world’s largest economy by 2041 (Wilson and Purushothaman 2003, p.10). Assuming that China’s GDP growth continued to grow at its current 8% per year over the next three decades would lead to the prediction that China’s economy would be three times larger than the US by 2030 in US dollar terms and 25 times larger by 2050 (Wilson and Purushothaman 2003, p.6). India. While growth in the G6, Brazil, Russia and China is expected to slow significantly over the next 50 years, India’s growth rate will remain above 5% throughout the period. India’s GDP will outstrip that of Japan by 2032. With the only population out of the BRICs that continues to grow throughout the next 50 years, India has the potential to raise its US dollar income per capita in 2050 to 35 times current levels. Still, India’s income per capita will be significantly lower than any of the countries we look at (Wilson and Purushothaman 2003, p.10). Russia. Russia’s growth projections are hampered by a shrinking population (an assumption that may be too negative). But strong convergence rates work to Russia’s benefit, and by 2050, the country’s GDP per capita will be by far the highest in the group, and comparable to the G6. Russia’s economy overtakes Italy in 2018; France in 2024;UK in 2027 and Germany in 2028 (Wilson and Purushothaman 2003, p.10). The high growth rates in China and India, and recently also Russia, have increased the BRIC countries’ importance to the global economy. Over the last 10 years the BRIC share of the global economy has thus increased by just over 1.5 percentage points. In terms of GDP at market prices, however, the BRIC countries’ role in the global economy is still relatively small. Today they account for approximately 8 per cent of the total global economy; while the seven countries in the G7 group account for almost 65% (Jensen and Larsen 2004). Another important implication in the expansion of the BRIC economies is the increased demand for oil and dependency on energy resources. From Goldman Sachs’ second report1: China and India will emerge as the worlds largest car markets over time. Within 20 years, China most probably will have overtaken the US as the worlds largest car market. India will also displace the US about 10-15 years later. Highlighting Indias greater inefficiency in energy use, the data indicate that within 15 years Indias contribution to global oil demand growth will overtake Chinas. Indias share of actual global oil demand will also peak near 17-18 per cent, similar to Chinas. The report makes the point that the emergence of the BRIC economies has already had an impact on global commodity markets, namely the impact of China. The huge price run-up in most industrial commodities is attributed to strong Chinese demand. Jensen and Larsen also state that BRIC countries must also contend with issues on population growth aggravated with issues on health such as HIV infection. The prevalence of HIV/AIDS will be a growing challenge for the BRIC countries. Although the incidence of the disease as a percentage of the BRIC populations is still modest compared to Southern Africa, the absolute figures are high. The National Intelligence Council1 expects that up to 2010 the number of infected people will increase many times over. India is thus expected to have 20-25 million infected people (more than any other country), China 10-15 million and Russia 5-8 million. This will correspond to infection rates of approximately 3-6 per cent in Russia, approximately 2% in India and approximately 1% of the population in China (Jensen and Larsen 2004). Figure 1. 2003 Economy and Income of G7 and BRIC Countries Note: All data is in current prices or calculated on the basis of data compiled in current prices. Source: The National Bank of Denmark (Jensen and Larsen 2004) from http: Monetary%20Review%20-%204th%20 Quarter %202004.htm Potential of BRIC Economies Speculations by experts about China’s economic performance surpassing those of the present superpowers are not new. Occupying a peripheral position in the international economic system, China has been expected by experts that its total output (GDP) will outstrip those of Germany and France, and even that of Japan, by early in the 21st century (Anderson et al. 2000, p.95). With an average annual growth rate close to 9.8% since 1980, China definitely meets all the criteria for an emerging market economy. It is followed by India and Brazil with average annual growth rates of respectively 5.8% and 2.4% (The National Bank of Denmark 2004).If Chinese growth rates are sustained at or close to current levels, may predict that the Chinese economy will be larger than that of the United States by about the year 2020. China’s phenomenal economic growth lies at the heart of predictions of many that China will evolve into a superpower rival to the United States at some stage in the early decades of the 21st century (Anderson et al. 2000, p.95). Characteristic of the high growth in China is that it stems from strong expansion of capital input, as well as growth in both labour productivity and technological progress in the form of total factor productivity. On the other hand, the contribution from a larger workforce has been smaller. An equivalent pattern is seen for the slightly lower growth in India, where employment has played a greater role, however (Jensen and Larsen 2004). Singh (1985, p.2-3) cites that China and India [including Brazil, Mexico and the Republic of Korea] are the Third World’s leading semi-industrial economies, accounting for the greater part of the Third World’s total industrial production. Over the last fifty years, these countries all managed to develop fairly diversified industrial sectors, trained their labour forces, and acquired significant managerial and organisational skills (Singh 1985, p.4). In the case of India, Singh (1985, p.26) cites the following factors leading to the sustained Indian rate of growth [particularly in the 1980s]: first, the decline in food imports that gave way to the substantial contribution to the balance of payments compared with the situation in the late 1960s and early 1970s. Second, the enormous increase in migrants’ remittances. With the rise in oil prices and the economic boom that it generated in the Middle Eastern countries, Indian workers migrated there in very large numbers and thereby made a major contribution to be country’s foreign exchange earnings. Figure 2. BRIC Countries’ Economic Growth, 1980-2004 Note: 2004 data are IMF estimates Source: The National Bank of Denmark (Jensen and Larsen 2004) from http: Monetary%20Review%20-%204th%20 Quarter %202004.htm Thirdly, the recent rapid expansion of India’s own oil production and impressive progress in oil-conservation measures (1985, p.26). However, Singh noted that the most important about the Indian economy is its long-term economic and industrial strategy, leading to the build-up of the country’s scientific and technical infrastructure, training of high-level cadres as well as a diversified capital goods industry (1985, p.29). In Brazil’s case, trade policy options result in a distribution of gains to the different households that is progressive, so that the poorest households experience the greatest percentage increase in their incomes. Trade policy changes in Brazil tend to shift resources from capital intensive manufacturing toward unskilled labor relative to other factors of production. There is also relative protection in Brazil, favoring capital intensive manufacturing at the expense of agriculture and food sectors that had been disadvantaged relative to manufacturing. This in turn results in an increase in the incomes of the poorest households in Brazil relative to the richest (Harrison et al. 2003, p. 3). Conclusion Jensen and Larsen (2004) provide as to how the BRIC economies should perform in the future to level itself with the existing mature economies: The challenge they all face includes ensuring sustainability at a high growth rate, reducing the rural/urban income gap and maintaining macroeconomic stability. Reforms of the financial sector in order to better handle rising capital flows and mobilise domestic savings into productive investments will also be important. The BRIC countries share a number of common characteristics, but there are also important differences. Brazil will face the major challenge of opening up its economy and creating a larger domestic savings pool to finance investments. In Russia, the challenge is to reduce the economy’s dependence on oil and to fight corruption, while in India the key challenges are greater openness, better education and improved infrastructure. In China, ongoing reforms of state-owned enterprises and banks will take high priority. The issue whether Brazil, Russia, India and China will overtake the present economic superpowers in the future still remains to be seen. Although the Goldman Sachs’ report might seem to be very plausible in the future, the BRIC economies will still have to contend with economic factors that could possibly hinder them or aid them in getting to where Goldman Sachs expects them to be in 2050. As for the existing economic giants, such as the Triad (the US, European Union and Japan), this threat might eventually lead them to their doom unless necessary protective actions on their part are done. References Anderson, E, Gutmanis, I, & Anderson, L 2000, Economic Power in a Changing International System, Biddles Ltd, Guildford & King’s Lynn, London. Casella, A 1995, Large Countries, Small Countries and the Enlargement of Trade Blocs, National Bureau of Economic Research, Inc., Cambridge. Harrison, G, Rutherford, T, Tarr, D, & Gurgel, A 2003, Regional, Multilateral, and Unilateral Trade Policies of MERCOSUR for Growth and Poverty Reduction in Brazil, The World Bank Development Research Group, Washington, DC. Heytens, P & Zebregs, H 2003, ‘How fast can China Grow?’, China Competing in the Global Economy (eds. Wanada Tseng and Markus Rodlauer), International Monetary Fund, United States of America. Morisset, J 1997, Unfair Trade? 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