Throughout the trajectory of modern economic history, each phase of global growth has been driven by a small set of countries. Between the Tang and Ming dynasties (600–1600), China was a dominant force in the global economy, accounting for a quarter of its output and as much as a third of its growth. The Renaissance saw the beginning of the rise in the economies of Western Europe---beginning first with Italy, Portugal, and Spain; then, with the advent of the Industrial Revolution, France, Great Britain, and the Netherlands---accompanied by a transformation of incomes, production, and trade. Following the Second World War, global growth was led by the United States---especially the mighty American consumer---but postwar Germany, Japan, and the former Soviet Union were also economic drivers in their own right (see figure).
Source: World Bank staff calculations, from Maddison (2009).
Growth in the first half of the 21st century is likely to be driven by the inexorable rise of new growth poles in the emerging economies of the world; countries such as China and India, and other emerging economic powerhouses. These countries---memorably christened the BRICs (Brazil, India, China, and Russia) by Goldman economist Jim O'Neill in 2001---are expected to pick up the mantle of global growth poles through till 2050, along with other major emerging markets, such as Mexico, South Africa, and South Korea.
In many ways, the rise of these economies can even be seen if one looks carefully enough at the current tea leaves. The post-financial-crisis performance of the developing world has been undeniably stronger that of the industrialized economies. Developing countries as a whole grew by 1.2 percent in 2009, compared to an average of -3.3 percent for high-income countries. Projected global growth rates (links to PDF) in 2010 and 2011 indicate that emerging economies will continue to expand considerably faster than their high-income counterparts, with China and India (with growth of 9 and 8 percent in 2011, respectively) likely to be the main flag-bearers.
China, which is expected to overtake Japan as the world's second-largest economy in 2010, is already the world's largest exporter (surpassing Germany with little fanfare in 2009). China now has the three largest banks in the world (by market capitalization), compared to none in the top 20 just a brief decade ago. In PPP terms, about half of the world's largest 15 economies are emerging or developing countries, a situation almost unimaginable fifty years ago. Ultimately, these emerging economic powerhouses will increasingly become the world's major consumers, investors, and exporters.
As Hans shared last week, how these emerging growth poles will generate self-sustaining, internally-driven growth is a matter of much concern. For the past half century, global economic growth has been driven by consumption demand from developed countries, with Japan, the East Asian dragons, and subsequently India all taking off on the basis of export-led growth strategies. Since the late 1990s, however, global growth has been almost entirely driven by U.S. consumer demand. Given the financial crisis and subsequent deep recession in the United States, U.S. consumers are unlikely to sustain this pattern of demand growth in the foreseeable future, and the sustainability of this model---especially in the aftermath of the global crisis---has increasingly been called into question (of course, if we look back even further, economists such as Paul Krugman and Alwyn Young did raise legitimate questions about non-productivity-driven growth strategies).
As a consequence, in order to move forward, the new growth poles will need to develop sources of internal demand---from either increased consumption or investment---to support global growth. That they can do so is far from clear. The total trade share of GDP for China, for example, remains fairly high, at 59 percent (2008 figures; includes only merchandise trade). Currently, other growth poles, such as South Korea (total trade share of 107 percent), also appear to be reliant on export-driven expansion.
Yet the historical data do suggest that shifting growth toward domestically-oriented sources is possible. Indian gross fixed capital formation was 20 percent of GDP in 1988; twenty years later, it has increased to 35 percent; moreover, the contribution of investment growth to GDP growth between 2000--2008 was about one-half. Similarly, Brazil's consumption share of output stands at a healthy 60 percent in 2008; the consumption share even increased during the crisis, to 64 percent in the third quarter of 2009. Even for China, the growth contribution of total consumption amounted to about a third (between 2000--2008, consumption growth was 4.1 percent while GDP growth was 10.2 percent); although a significant share of this growth had its origins in the public sector. Finally, the sheer force of demographic growth, while often seen as a possible drag if not well-absorbed by the labor economy, can also be realigned toward private spending and thus serve as a potential source of growth.
So, there may be cause for cautious optimism as we tentatively peer into the global economic horizon, and imagine the world as it could be in 2025.