Monday, September 25, 2006

Good News in the World

Part Two

More good news. Too much good stuff to quote here, really, with graphs and numbers.

Last year the combined output of emerging economies reached an important milestone: it accounted for more than half of total world GDP (measured at purchasing-power parity). This means that the rich countries no longer dominate the global economy. The developing countries also have a far greater influence on the performance of the rich economies than is generally realised. Emerging economies are driving global growth and having a big impact on developed countries' inflation, interest rates, wages and profits. As these newcomers become more integrated into the global economy and their incomes catch up with the rich countries, they will provide the biggest boost to the world economy since the industrial revolution.

In a nutshell, the GDP of the developing world is catching up with the developed world. And it's gaining at a remarkable clip. How fast?

Faster growth spreading more widely across the globe makes a huge difference to global growth rates. Since 2000, world GDP per head has grown by an average of 3.2% a year, thanks to the acceleration in emerging economies. That would beat the 2.9% annual growth during the golden age of 1950-73, when Europe and Japan were rebuilding their economies after the war; and it would certainly exceed growth during the industrial revolution. That growth, too, was driven by technological change and by an explosion in trade and capital flows, but by today's standards it was a glacial affair. Between 1870 and 1913 world GDP per head increased by an average of only 1.3% a year. This means that the first decade of the 21st century could see the fastest growth in average world income in the whole of history.

Whoa. But wait - there is more.

An alarming number of economic variables are currently way out of line with what conventional economic models would predict. America's current-account deficit is at a record high, yet the dollar has remained relatively strong. Global interest rates are still historically low, despite strong growth and heavy government borrowing. Oil prices have tripled since 2002, yet global growth remains robust and inflation, though rising, is still relatively low. House prices, however, have been soaring in many countries.

This survey will argue that all of these puzzles can be explained by the growing impact of emerging economies. For instance, low bond yields and the dollar's refusal to plunge are partly due to the way these countries have been piling up foreign reserves. Likewise, higher oil prices have mostly been caused by strong demand from developing countries rather than by an interruption of supply, so they have done less harm to global growth than in the past. And their impact on inflation has been offset by falling prices of goods exported by emerging economies. This has also made it easier for central banks to achieve their inflation goals with much lower interest rates than in the past.

Yet it's this gives me pause

This means that the first decade of the 21st century could see the fastest growth in average world income in the whole of history.

Part Three
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