Back to the Future

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ImageImagine if, in 1799 – the year in which Napoleon seized power – a research institute had published its global forecasts for the next 20 years. Its researchers would have known about the tremendous changes that took place over the previous two decades: from the United States’ declaration of independence, through the French Revolution and the execution of Louis XVI, up to Napoleon’s victory over Austria in his Italy Campaign.

Even so, the chances of the researchers accurately predicting the events that came to pass over the subsequent 20 years, including their impact on the 19th century’s world order, would have been infinitesimal. No one could have anticipated that Napoleon would have plunged Europe into non-stop war for a decade until being overcome at Waterloo, or that, by the time of his defeat, he would already have swept away the foundations of traditional structures and initiated an unstoppable wave of reforms.

Because of its industrial might, this Europe would dominate the rest of the world during the 19th century. When European rivalries exploded into World War One, the face of the earth had already changed considerably compared to the previous century. And, having changed the world, Europe set the conditions for the demise of its own empire. Even before World War One, Teddy Roosevelt had heralded the start of the United States’ ascension to its current hegemony.

Nowadays, those looking to make global forecasts also base themselves on the observation of spectacular events: the fall of the Berlin wall, the attacks of 9/11, the invasion of Afghanistan and Iraq, China's extraordinary growth, bloody conflicts in South Asia and the Middle East, and the 2007-2008 financial crisis that began in the US and spread to the rest of the world. These are events that sometimes befuddle our senses and prevent us from seeing the future; a future that research institutes continue to map out based on the military might of the US and China’s spectacular growth.

Another forecast that has already become a cliché is that, within only a few decades, the economies of the BRIC nations (Brazil, Russia, India and China) will overtake the current top six economies.

IImagenvestors need to forecast the future because more than 80% of the value of the biggest stock exchanges in the world depends on companies’ performances – not today, but over the next ten years. And for those who want to make money, it is necessary to gamble not just on the companies of the future, but also on the countries whose currency will appreciate.

The BRICs’ wealth will come from their economic growth and the appreciation of their currencies. A country’s currency will increase in value in the measure that its productivity and per capita income increase – and, as the BRICs look to take on a larger share of investment portfolios, the resulting movement of capital should contribute to their growth over the next 30 years.

Although the highs and lows of each decade tend to balance out over a period of 30 years, some events could render any forecast obsolete. Examples include another arms race, the threat of a nuclear Iran and increased rivalry between India and Pakistan, a revolution in the energy sector and the ways we respond to climate change. The irony is that even these possibilities correspond to visions of someone who looks at the world through the rearview mirror. Experience is a backward facing headlamp, a lantern astern.

Real visionaries are poets and artists. Long before the advent of research institutes, they imagined flying machines and test tube babies. In any case, the growth of the BRIC nations during the US crisis has felled the concepts of North and South, and of developed and developing countries, that we had become accustomed to when separating the world.

In the very short run we suspect a moderate and uneven global recovery, still marked by heightened uncertainty and volatility in financial markets. But we will continue to see strong growth in South Asia.

The World Bank Regional Outlook claims that thanks to activity in India, South Asia has outperformed all other developing regions in attracting investment commitments to new infrastructure projects with private participation in the first three quarters of 2009. Facilitated by the PPP programs at national and state levels and liquidity in its domestic financial market, private participation in India’s infrastructure is growing fast.

How important do you think these investments are to create the basis for the manufacturing expansion that would bring South Asia to middle income status? What difference will this make for the future of the world?


Eliana Cardoso

Former Acting Chief Economist

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