WHERE IS THE WORLD ECONOMY HEADING?

Dr Derek Braddon

Reader in Economics

Bristol Business School

Year 12 Economics Conference University of the West of England Wednesday 27 June 2007

WHAT DRIVES THE FUTURE ECONOMY?

Wealth and Population? Macro Issues?

Interest Rates? Oil? Industrial Restructuring? China &India?

KEY ISSUES

• Inflation: rich nations = 1 to 5%; poor nations = 6 to 60%.

• Energy price problem, especially oil• Start of new inflation problem?• Major trade imbalances with USA• Economic growth: major industrialised

nations enjoying faster growth; rich-poor gap increasing; world poverty issue

WHAT WAS DRIVING THE ECONOMIC RECOVERY?

• Very low interest rates

• Continued expansionary fiscal policy

• Recovery in company finances

• Buoyant consumer demand

• Some stock market recovery

GLOBAL SHORT TERM INTEREST RATES

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FED RESECBBOJ

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SO WHERE ARE WE NOW?

• Renewed threat of inflation• Impact of rising interest rates• Can growth impetus be maintained?• Problem of US deficits and world’s

ability to finance them• Convergence of new challenges for global

economy – unprecedented combination of pressures

THE FUTURE OF THE WORLD ECONOMY: FOUR MAIN ISSUES

• Energy Prices

• The New Industrial Revolution

• Emerging Super-powers: India and China

• Poverty Eradication

THE ENERGY ISSUE

A CLASSIC SUPPLY & DEMAND BATTLE

OIL

• World oil demand is increasing, driven by increasing population, the industrialization of China and India and huge US appetite for oil.

• Supply is keeping up with demand at present but world oil production peaks around 2010-2015 when demand will then exceed supply.

• Among other consequences, the oil price will increase dramatically. Other fuel sources become economically viable – but can they replace oil at rate required?

OPEC estimates, 2006

Actual

THE NEW INDUSTRIAL REVOLUTION

THE CHANGING FACE OF INDUSTRY• Globalisation + Privatisation + International Capital Flows +

Technology Revolution driving fundamental transformation of all kinds of business.

• Merger and Takeover Boom - £1,260 bn in first half of 2007 alone (finance, energy, real estate) - 25% above record set in 2000

• Cyberspace Boom – Ohmae’s ‘invisible continent’ - global e-commerce will be worth US$ 8,000 bn next year - with almost 90 per cent of all online transactions made in only 12 countries.

• Corporate restructuring: flatter management hierarchies; joint ventures, strategic alliances and technology partnerships changing meaning of ‘competition’; global product & IT for scale and scope economies; optimal location choice for research, design, production, marketing etc; impact of ‘glocalisation’ and ‘mass customisation’.

[continued]• ‘Out-sourcing’: companies focusing on core business

and buy in what they need from smaller, specialist firms; and:

• ‘Off-shoring’: movement of jobs to low cost countries; e.g.UK off-shores to India, China and East Europe – e.g. in financial services, 50,000 jobs moved last year, saving £1.5 bn.

• Overall, recognition that, in future, sustainable competitive advantage will depend more on new process technology than on products. “Human-made comparative advantage has finally replaced natural comparative advantage” (Thurow).

MANUFACTURING EVOLUTION

1900-70 1971-2000 2001-20• Focus Mass prod Flex Prod Mass Cust

• Machine Tools 150 30 - 50 20

• Product Range 10 - 15 100 - 1000 unlimited

• % poor quality 25% 0.02% 0.0005%

Source: Harvard Business Review, 2002

THE KEY POINT

For the first time in recent history, the whole planet is either capitalist or highly dependent on capitalist economic processes. But it is a new brand of capitalism.

Productivity and competitiveness are mainly driven by knowledge generation and information processing.

Firms and territories are organised in networks of production, management and distribution; the core economic activities are global - that is, they have the capacity to work as a unit in real time, or chosen time, on an international scale.

EMERGING SUPERPOWERS

India and China

WINNING THE ECONOMIC FUTURE: INNOVATION AND DESIGN

• USA and Europe seem to assume that future growth for them is innovation and design-led while India and China will act as low-cost producers.

• Appealing idea for economists since it maintains the Ricardian comparative advantage thesis intact – therefore, theory appears to strengthen this view of future world prospects

• Growing case-study evidence however that suggests the ‘design and innovation’ element of business is being embedded more and more into leading companies in both emerging economies.

CHINA

Growth has been very rapid GDP growth at constant prices

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CHINA• China’s GDP has quadrupled since 1978. Measured on

a purchasing power parity (PPP) basis, China in 2004 was the second-largest economy in the world after the USA.

• Has the third largest stock of foreign direct investment in the world

• Has saving and investment = to 40% GDP

• Is the 3rd largest importer and 4th largest exporter in the world – huge impact on commodity market (esp. oil)

• Its imports will drive up price of commodities and its exports will cut prices of manufactured goods in world markets – huge competitive challenge to existing players

INDIA

INDIA• 10th most industrialised country in the world• 4th largest economy in terms of purchasing power• 3rd largest scientific and technical labour force in the

world with well-established IT base• 2nd largest exporter of computer software and home to

software developments centres of some of world’s largest companies. Over 200 of the Fortune Top 1000 global companies now use Indian software services and professionals

• Extremely well-educated and competitive labour force – another growing economic power for the future.

An Economic Overview of India

Strengths

sustained growth at 6.4 for over a decade (but recent slowdown)

strong export potential, current a/c deficit low

healthy forex reserves low external debt

low inflation regime

political consensus on reforms

deepening financial sector knowledge base advantage,

demographic surge

Weaknesses

fiscal deficit high, debt / GDP ratio high fiscal situation of states worse inadequate infrastructure, huge funding

need unsatisfactory investment climate rising gap between rich and poor states dependence on oil imports; effect of

monsoons etc slowing of reforms, coalition consequences social indicators below world average

ENDING POVERTY

Can we save Africa?

AFRICA – THE STRUGGLE FOR SURVIVAL

• “Africa’s poverty is a scar on the conscience of the world” (Tony Blair, World Economic Forum, Davos, June 2005). Only continent to have become poorer in last 25 years.

• 150m African children live below the poverty line and two-fifths of African children are malnourished (Oxfam).

• During this lecture, 900 children will have died from starvation and related illnesses, > two-thirds in Africa.

• WHO believes 34m people have AIDS, 25m of these are in sub-Saharan Africa. During this lecture, 400 children in Africa will have been made orphans due to AIDS.

• This is a continent that is staggering backwards on almost every front - education, sanitation, infant mortality, disease eradication - while the rest of the world moves forward in the 21st century.

AFRICA – THE STRUGGLE FOR SURVIVAL

• Universal free primary education in Africa, promised for 2015, at current rates will not occur until 2130.

• Half the population of sub-Saharan Africa (SSA) live on less than $1 per day.

• Africa's > $200 billion debt burden is the single biggest obstacle to the continent's development.

• SSA countries spend almost $14 bn annually on debt service but receive only $10 bn in aid.

• G8 finance ministers agreed at a meeting in London on 11 June 2005 to write off $40bn in debt owed by 18 of the world's poorest countries, most of them in sub-Saharan Africa.

• Promising step forward but of 40 countries targeted, only 18 have yet reached ‘Millennium Development Goals’ to qualify for debt write-off.

WHERE IS THE WORLD ECONOMY HEADING?

• In the short-run, further economic growth for rich nations but with concerns about inflation returning and the employment impacts of global corporate restructuring.

• In longer run, greater economic instability as the world tries to adjust to the emergence of new economic powers, resolve the issue of endemic poverty in Africa and contemplate a world without oil but with major climate change.