Monday, June 10, 2002

Potential Growth Stars of the 21st Century

This article identifies countries with potential to be the fastest growing ones in the first decade of the 21st century.” An October 1999 paper by the author identified the fastest growing economies of the last two decades of the 20th century, analysed these growth patterns and used these for making projections for the first decade of the 21st century []. The per capita GDP growth forecasts on which the ranking is made, are based on the growth trend analysis.
Three of the eleven high growth economies from the 1980-2000 period, Hong Kong, Malaysia and Indonesia loose their place among the star performers in the 21st century (table 2). In fact Malaysia is no longer in the top ten during 1980-2000. Hong Kong growth has been on a declining trend, which had already taken it to the bottom of the star set during 1980-2000. It seems to have reached the end of its high growth curve. There is a question mark on whether it can even grow at the top of the high-income countries’ growth range, given the change in its political status coupled and its currency board system. The Asian crises coupled with the additional costs imposed by the Euphoria-Panic cycle will push Indonesia down from its earlier 9th position. The political upheaval and transformation may also add to the delay in recovery as the new political system takes time to settle down. Half a decade may pass before Indonesia can hope to get back into the ranks of the star performers.
Table 2 : Per Capita GDP Growth Forecast for 2000-10

Country Rank Avg gr rt

Ireland Top 3 6.9%
China* Top 3 5.9(4.9)%
India** Top 3 5.7%
Chile Top 5 4.6%
Korea, S Top 5 4.4%
Vietnam Top 10 3.5%
Singapore Top 10 3.0%
Thailand Top 10 3.0%
X Top 10
X Top 10
1) The forecast for 2000-2010 is based on analysis of past trends.
2) * The forecast for China assumes that past over-estimates of growth by 2% would be gradually corrected over the decade (0.2% point per annum).

The top three performers in the first decade of the 21st century are forecast to be Ireland, China and India. Ireland and India share two characteristics. They were the two surprise entrants to the ranks of the star performers in the last two decades of the 20th century, and the only two in the accelerating phase of high growth during these decades. Even if Ireland reaches a plateau, maintenance of this growth rate would make Ireland the fastest growing economy.
China seems to have entered the decelerating phase. Any forecast of China’s growth is, however, complicated by the fact that past growth is over estimated by an average of 1 to 2% per annum. We have assumed an overestimation of 2%, and projected it to be corrected through better statistical systems over the next decade, to become 0% by the end of the decade. This yields an average growth rate of 5.9% (published) per annum which is marginally higher than that estimated for India. If a full correction of 2% is made growth rates of per capita GDP would be 4.9% (actual). This would lower China’s rank below that of India, but still leave China among the top three performers during the next decade.
The China forecast is based on our analysis of euphoria and the possibility of accumulated negatives in a society and polity such as China. Among the inconsistencies or incongruities, which suggest such hidden negatives are:
a) Reports of masses of unemployed people roaming the countryside looking for work. A typical low-income Asian “labour surplus economy” is characterised by disguised unemployment in the rural sector. For such a country to have mass open unemployment after 18 years of 10.6% (or even 8.6%) growth, denotes inconsistency.
b) Low-income countries have relatively low domestic saving rates, higher domestic investment and a corresponding deficit on the current account of the Balance of payments. China in contrast has phenomenal levels of domestic savings and investment coupled with very high levels of FDI and a surplus on the current account for 12 of the past 17 years (with an average surplus about 0.5% of GDP). This historical anomaly is sustainable.
c) China has comprehensive capital controls, a current account surplus and rising foreign reserves for much of the period. Yet the post crisis years have seen repeated discussion/speculation of a Chinese devaluation. With capital account controlled, a devaluation in the presence of current account surplus and rising reserves is a complete violation of market economics.
d) China’s labour intensive exports are highly competitive, not so the capital-intensive exports produced by the state enterprises. Yet a very large variety of such exports at unbeatable prices are increasingly found in developing countries. The possibility that these entail implicit subsidies in the form of losses financed by loans from the State banks is high. Late nineties estimates of non-performing loans of around 24% (50% in 2001) of GDP support this hypothesis. It would also suggest future difficulties with respect to export growth.
Despite these potential negatives our forecast assumes a decline in average real per capita GDP growth of only about 2% points from its performance in the last two decades.
India on the threshold of the 21st century is still a low-income country with an enormous amount of catch up still left. The greatest strength is the free, open and democratic society and polity, which ensures that all weaknesses and problems are fully exposed and debated. The actual growth rate will depend on the pace and depth of reforms that follows from this knowledge. Growth may be slower than projected if some critical reforms such as the reallocating and improving the quality of government expenditure are not undertaken in the next 5 to 10 years. Achievement of per capita GDP growth above the projected 5.7% would require a substantial step-up in the pace of economic reforms. The projected growth rate of 5.7% per annum over the next decade is 1.6 per cent point higher than the trend growth rate during the last two decades. It would move India from 6th rank in 1980-2000 to third or higher rank in 2000-2010. This is a feasible because India will undergo a demographic transition during the next two decades, which will lower the dependency ratio (dependents per worker) and could increase per capita GDP growth rates by about 0.7%.
South Korea is the only other country to retain its position among the 6 fastest growing economies while Chile moves up to this sub-category. Korea has previously had very sharp drops in growth. The current drop is however much sharper and reflects a larger accumulation of negative factors requiring policy reform and new approaches. It is likely to move back towards its long-term trend growth rate, ensuring its position in the top six. Chile has been moving up the growth rankings and appears set to continue on this path even though its past recovery-record is mixed. Several setbacks were semi-permanent and reduced trend growth while others were followed by a renewal of vigorous growth. The growth slowdown this time is relatively minor and therefore expected to be reversed.
Vietnam, Singapore and Thailand are the other three star performers of the last two decades, which may remain stars. Though Vietnam seems to have come to an end of one growth cycle, it has the potential to re-accelerate given sufficiently purposeful reforms. There is however the possibility that such reforms will not take place for political reasons and Vietnam will drop out of the top ten. Thailand still has high growth potential but also an accumulated baggage of un-addressed negatives. The degree of attention and success in dealing with the accumulated problems will determine its growth ranking. In both cases an average pace of reforms is assumed in placing them in the top ten. Singapore will continue on its gradually declining growth trend but likely remain in the top ten during the next decade.
Promising potential candidates for inclusion among the star performers of the 21st century are Sri Lanka, Norway, Laos, Poland, Bangladesh and Uganda. Thus for the two slots vacated by Asian countries in the top ten, three of the six potential candidates are from Asia and four out of six are poor countries in which policy reforms will play an important role. Over a slightly longer horizon Indonesia remains a candidate while Malaysia’s performance could still be in the top 15. Given that 11 of the 16 fastest growing economies in the next decade could well be Asian the possibility of an ‘Asian century’ cannot be ruled out.

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