Long term prospects for the world economy

In December 2006, the World Bank presented an upbeat view of long-term growth of the world economy in its latest Global Economic Prospects (2007). Among the rosier forecasts for the world in 2030:

• the number of people living on less than $1 a day will fall from 1.1 billion now to 550 million in 2030.
• developing countries' share in world trade will rise from 30% today to 50% and their share in world GDP in PPP terms to 60%.
• average incomes in the developing world will converge to those in high-income countries; Bangladesh will be as prosperous as the Netherlands.

So, are we on our way to Paradise?

Robert Wade, the well-known development economist, sounds a cautionary note in FT. He questions two key assumptions: one, globalisation will continue; two, globalisation will lead to better results for all.

In reality, much of the success attributed to globalisation is in fact the success of one giant country: China. The picture of the past 25 years would look quite different if we took the typical developing country rather than the average for all of them (which is pulled up by China). For example, the fall in the number of people in extreme poverty since the early 1980s is due entirely to the fall in poverty in China. Take out China, and the number rose.

Many developing countries have gained little from globalisation and export-led growth and it is unclear whether they will gain more by continuing on the same track. The World Bank’s model also assumes that free-trade norms will continue to prevail. This is doubtful. In affluent countries, a lot of evidence suggests that further affluence is reducing people’s capacity to enjoy it. Throughout the west, rates of over-eating, family breakdown and addiction are rising. It is possible that electorates will respond by seeking to “embed” certain markets more firmly in a framework of political controls, even at the cost of slower growth.

In developing countries, disillusionment with the paradigm of maximum openness is growing, as those that have moved towards free movement of goods, finance and enterprises have not experienced substantially improved economic performance. The focus on export-led growth has created intense competition between developing country producers to lower costs – including labour and environmental costs – and the exchange rate.

Wade mentions two other risks to the World Bank's rosy scenario: war and excess supply. Disruptions from war are very likely because the rise of new states always creates conflict with existing players.

I would add this: projections that extrapolate current trends far into the future are generally suspect. So also the belief that the spread of the market economy is calculated to usher in generalised prosperity. If that were so, why would governments in India get tossed out on the back of terrific economic performance?