November 09, 2012

OECD World Economy Outlook out to 2060

OECD - Looking to 2060: Long-term
global growth prospects - A GOING FOR GROWTH REPORT No. 03 (30 pages)

This OECD forecast is using the current World Bank purchasing power parity calculation which likely understates China's GDP by PPP by 70%

A paper, Who Shrunk China? Puzzles in the Measurement of Real GDP by Robert C. Feenstra, Hong Ma, J. Peter Neary, D.S. Prasada Rao argue that IMF’s estimate of China’s GDP for 2005 was 50% too low. (37 pages)

Their analysis is important, not just because it is carefully done, but also because Professor Feenstra will be leading the effort to produce the next generation of the Penn World Table GDP (PPP-based) estimates.

If they are right, and if I therefore might have underestimated China’s 2010 GDP (PPP dollars) by about 20 to 23 percent, three conclusions follow.

This implies China’s 2010 GDP PPP exceeded $17 trillion and in 2012 will reach $20 trillion.

India would also be understated by about 40-50% if the updated analysis is correct.

The balance of economic power is expected to shift dramatically over the next half century, with fast-growing emerging-market economies accounting for an ever-increasing share of global output, according to a new OECD report.

Divergent long-term growth patterns lead to radical shifts in the relative size of economies. The United States is expected to cede its place as the world's largest economy to China, as early as 2016. India’s GDP is also expected to pass that of the United States over the long term. Combined, the two Asian giants will soon surpass the collective economy of the G7 nations. Fast-aging economic heavyweights, such as Japan and the euro area, will gradually lose ground on the global GDP table to countries with a younger population, like Indonesia and Brazil.

China will see more than a seven-fold increase in per capita income over the coming half century, but living standards will still only be 60% of that in the leading countries in 2060. India will experience similar growth, but its per capita income will only be about 25% of that in advanced countries.

"None of these forecasts are set in stone," Mr. Gurría said. "We know that bold structural reforms can boost long-term growth and living standards in advanced and emerging-market economies alike."

OECD research shows that wide-ranging labour and product market reforms could raise long-term living standards by an average of 16% over the next 50 years relative to the baseline scenario, which only assumes moderate policy improvements.

In China, that means a jump from $8,387 in 2011 to almost $60,000 in 2060, in constant 2011 dollars. By contrast, U.S. GDP per capita in 2011 was $48,328.

OECD also projects declining inequality between countries over the next fifty years. The United States will still have a much bigger GDP per capita than China in 2060 — about $136,611, if the OECD is right. But that’s a little more than double China’s level, whereas today, U.S. GDP per capita is almost six times that of China’s.

Despite China’s looming demographic challenges, the OECD projects it will surpass the euro area in 2012 and the United States “in a few more years,” to become the largest economy in the world measured by purchasing power parity (which measures purchasing power adjusted to reflect for exchange rates).

By this measure, the report says, India is surpassing Japan and is expected to surpass the euro area in about 20 years. The faster growth rates of China and India imply that their combined GDP will exceed that of the economies of the G7 countries (the United States, Japan, Germany, Britain, France, Italy and Canada) by 2025, the OECD said. By 2060, it will be more than 1.5 times larger.

In 2010, China and India accounted for less than one-half of G7 countries GDP. The OECD predicts that by 2060, the combined GDP of these two countries will be larger than that of the entire OECD.

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