Author: Jim O’Neill.
This paper discusses the state of the world economy as we approach year-end, with particular emphasis on the relationship between the G7 and some of the larger emerging market economies.
We show that our latest forecasts for 2001 and 2002 suggest a healthier outlook in some of the larger emerging market economies compared to the G7. We are currently forecasting 1.7% world GDP growth in 2002 with Brazil, Russia, India and China (BRICs) each set to grow again by more than the G7.
Whilst the divergent degree of the 2001/2002 relative outlook is unlikely to be sustained over the next decade, a healthier environment for the BRICs seems likely to remain, and as a result, their share of world GDP is set to rise.
On a PPP basis, the aggregate size of the BRICs was about 23.3% of world GDP at the end of 2000, somewhat higher than both Euroland and Japan. Whilst on a current GDP basis, the size of the BRICs is just under 8%, this is also set to rise. Some of these countries are already bigger than some individual G7 economies; China, at 3.6% of world GDP (using current US$ prices), was slightly bigger than Italy at the end of 2000, and notably larger than Canada.
We consider four different scenarios for the next decade based on various nominal GDP assumptions for 11 countries (the G7 and BRICs), and different assumptions about exchange-rate conversion. The nominal GDP assumptions reflect our best guess about the likely trend rate of real GDP growth and inflation.
In Scenario A, we simply convert future nominal GDP projections at end-2000 exchange rates.
In Scenario B, we convert GDP projections using our GSDEER/GSDEEMER fair value exchange rate estimates.
Scenario C again converts at end-2000 exchange rates, but assumes that the 2001/2002 nominal GDP paths continue for 10 years.
Scenario D converts projected GDP trends using PPP conversions rather than estimated end-2011 current US Dollars.
In all four scenarios, the relative weight of the BRICs rises from 8.0% at present (in current US$) to 14.2%, or from 23.3% to 27.0%, converting at PPP rates. In each of these scenarios, the increasing weight is led by China, although the other three grow relative to the G7 countries also.
We also show our latest projections for likely timing of future EU joiners and subsequent membership of EMU. We suggest that there is a 50% or greater probability of another 13 countries becoming active members of EMU by the beginning of 2007, taking the total membership to 25 from today’s 12.
We argue that with 25 members of EMU, it will be necessary to reform the ‘active’ membership of the ECB Governing Council and recommend instead the introduction of an ‘FOMC-like’ rotating voting mechanism.
Such a development should be accompanied by a reduction in Euroland representation at the G7 from 3 countries to 1, and provide the basis for a significant reform of the G7.
In view of the expected continued relative growth of the BRICs, the opportunity should be taken to incorporate China and probably Brazil and Russia and possibly India, expanding the key body of global economic policy co-ordination to 8 or 9.
It is time for the world to build better global economic BRICs.