Friday, 6 April 2012

The Wealth of Nations

A New World Order
I have constructed an economic forecast of Annual GDP of countries in 2050, the results of the top twenty are shown in the above graph which are comparable to those predicted by Goldman Sachs, PWC, amongst other Investment Banks' and Central Banks' Forecasts. I have attached a link to the excel file, which you can download here; enclosed are the various calculations and assumptions I have chosen that I will expand upon in the following paragraphs.

I use a simple Solow Model with some tweaks of my own. The Solow model is an exogenous growth model based on Labour, Capital and Productivity. I have done away with Capital Deepening, Population Growth, and Asset Depreciation Effects; which would be difficult to model.

The first set of data points I chose were the population estimates for 2050 calculated by the International Data Base Division of the United States Census Bureau. In the excel file, you can see this in the sheet entitled "2050 GDP forecast Calculations". India is now the country with the largest population, 1.66 Billion, China is at 1.3 Billion having reached fertility replacement ratio by 2035, and US is still the third largest at 422 million due to immigration; other noteworthy countries are Nigeria which has 400 million souls, Ethiopia at 280 million, and Russia which has declined to 109 million.

I assume real exchange rates are constant, in that inflation differentials are the only determinants of exchange rates. Additionally, an average worker of the global labour force has a value-added baseline output of $20000 in current dollars. This is a weak assumption explained by the constant exposure to non-rivalrous and non-excludable Knowledge, and the insignificant differing effects of culture, religion, and ethnicity on human ability and sentience.

Thus far, we could show those economies with the largest populations would have the largest economies. The reasons for economic divergence are the differing qualities and quantities of capital and levels of productivity which are determined by 'types'. Such that economies like Nigeria and Ethiopia, due to current and past histories and poor social institutions, are endowed with 'low' productivity and capital; economies like China and Brazil are endowed with 'medium' productivity and capital; economies like the US and UK with 'high' productivity and capital; and finally economies like India and Indonesia which have both 'medium' and 'low' types of institutions and environments are described as 'lowmed'.

Baseline figure for capital per worker is $20000; which is scaled for low, lowmed, medium and high capital types by multiplying the baseline with 0.5,0.75,1, and 1.5, respectively; you are welcome to change the arguments of the products to construct your own rankings. With both labour and capital sorted; productivity is a measure of the efficiency with which both labour and capital are used and the application of the levels of technology. The sum of labour and capital are multiplied by 0.5,0.8,1.2 and 2 for low, lowmed, medium and high productivity types, respectively. The conclusion of which gives the income per capita.

Economies like the US and UK have an income per capita of $100000 in 2050, whereas Bangladesh has $15000; compared to $500 today, economies like Bangladesh have relatively converged to the levels of advanced economies by 2050 due to prolonged access to global capital and technology, and rising human capital and education of the labour force. However at the same time with diminishing returns but  technological improvements and perhaps paradigm shifts, advanced economies have not stagnated. The results are oversimplified, consequence of which leads to economies like Russia having overestimated GDP. Russia is classified as having 'high' capital and productivity when it should have 'lowmed' productivity because of its institutional weaknesses and, due to its vast resources, 'high' capital; a venture for another day.

Additionally I had some fun in calculating military expenditures for the countries in 2050. The types are 'strong', 'average', and 'weak' reflecting the willingness to maintain power projection and a standing military; spending 5%, 2%, and 1% of 2050 GDP, respectively. The results are alongside in separate sheets in the excel file. The graph below is the ranking:
Hey big spender
Just slightly changing the weightings for Capital and Productivity types alters the rankings. Nevertheless when dealing with long term economic growth, a county's population size matters. Brazil, India, China, and Indonesia feature prominently as economic giants by 2050. In the following experiment, I have reclassified Russia as 'middle' type. The weightings of capital are 0.2, 0.7, 1.2, and 1.6 and weightings for productivity are 0.4,0.8,1.2 and 2, for low, lowmed, medium, and high, respectively. The new rankings are in the graph below and the new excel file is accessible over here. As with all economic forecasts, long term especially, we should read it with some care.
Another World Order