The Perils Of Long-Range Forecasting
One thing I’ve been trying to get my head round lately are long-term economic growth forecasts out to 2050. The best known of these are produced by Goldman Sachs (see Dreaming With BRICs: The Path to 2050), but other investment houses have them too.
Having pored over these over the bank holiday weekend, I have to say that while I admire GS’ boldness, I doubt that several of these forecasts will come true. At first glance, predictions that China and India could surpass the US in terms of absolute US$ GDP within the next few decades seem reasonable, but I think there are much bigger caveats than generally acknowledged. I am even more dubious about some of the other rankings in Goldman Sachs’ forecasts, such as Russia and Indonesia overtaking Japan, and also for that matter Korea’s low ranking.
Their revised 2007 league table can be viewed on page 4 of this PDF.
Here are some of the variables that make me skeptical about long-range forecasts:
The fate of the sovereign state. For a start, it is far from clear if sovereign states as we know them will be the principal political or economic entities in 2050. Thus, it may not make sense to talk of ‘China’ or ‘India’ or ‘Brazil’ by that time. I see at least three other possible types of entities emerging in future, namely:
• Mega-urban regions, or city-region states (e.g. Sao-Rio in Brazil)
• Federations of city-regions (e.g. the Hanseatic League)
• Federations of existing sovereign states (e.g. the European Union)
It may be that in 2050 these will make much more sense economically – and even politically – than today’s Westphalian nation-state structure.
The fate of existing giant states. One of the reasons that I cannot see Russia and Indonesia emerging as dominant economies is that I have severe doubts as to whether they will survive until 2050. That’s why I find it amusing that Indonesia has sovereign bonds maturing in 2035. Russia and Indonesia are vast multi-ethnic empires with a history of separatist tendencies. In fact, Indonesia, a post-colonial creation spanning 17,000 islands, only narrowly survived disintegration over the past decade. I also see a reasonable chance that China or India could fragment in some form. Ditto other states in Goldmans’ 2050 Top 20 such as Nigeria and Turkey. Furthermore, the process of disintegration in any of these could be long-drawn out and violent, sapping political and economic capital that could otherwise be diverted to achieving prosperity.
The fate of the world’s climate. Climate change and environmental issues are very in vogue right now, and with good reason. In the case of China and India, I cannot help but feel that environmental degradation could come to serve as a check on economic growth. Meanwhile, rising sea levels threaten to largely flood other potentially promising emerging economies such as Bangladesh. While I am quite upbeat about Bangladesh for the next decade, I cannot be bullish till 2050, because it might be largely submerged!
However, there are some perceptions that climate change could be positive for Russia, if a warmer world makes vast tracts of Siberia habitable to millions more people. In fact, Russia could see immigration from places that are adversely affected.
The fate of the world’s energy sources. I suspect that many upbeat forecasts for countries such as Russia, Mexico and Nigeria are partly based on their vast oil reserves. Indeed, the anticipated explosion of car ownership in places like China and India are often cited to justify long-term upward direction in oil prices. However, what if we make a true breakthrough in clean alternative energies? Oil prices could fall substantially.
The fate of technology. I see it as quite likely that technological improvement – in areas such as robotics, nanotechnology, etc… – could compensate dramatically for demographic decline in countries such as Japan, Korea, and eventually China. Likewise, I suspect that there are emerging technologies out there that could prove major ‘game changers’, be it to the advantage of the dominant economies, or developing states. The ability of countries to exploit these could significantly affect their global ranking in 2050.
The fate of geopolitics. Finally, long-range forecasts understandably do not take into account possible wars, revolutions or ideological shifts. Admittedly, it would be very odd if investment banks predicted a Sino-Indian war in 2033, for example. But realistically, who can say that China and the US or India and Pakistan will avoid war, or that Russia will not succumb to revolution again, or that some new ideology might emerge that could stunt (or enhance) economic growth elsewhere? World War I seemed to catch Europe off guard in 1914.
Consider this: Twenty five years ago, the eastern European country that had the best prospects for converging with Western Europe was Yugoslavia. It had a much more open economy and was the most developed country in the region. Alas, it succumbed to violent civil war, and several of its offshoots, such as Bosnia, Serbia and Macedonia, are now clearly laggards on the path to EU membership.
The Road To 2050
Based on some of what I said above, I list below some out-of-whack suggestions for major economies to watch in the run up to 2050. (Please note that these are not official BMI forecasts!)
Polarica: The US, having lost the southwest to Mexico, will unite with Canada and absorb most of Siberia through direct land purchases from a weakening Russia. This new superstate will benefit from a significantly warmer agricultural climate, massive mineral resources and US-Canadian technology, and will remain the world’s largest economy.
Aztlan: The absorption by Mexico of the US southwest will mean that this too will be a major player in the Western hemisphere.
NorPac Metro League: China’s heavily urbanised eastern seaboard will form an economic and trading league with Japanese, Korean and Taiwanese cities.
Ariana Federation: Iran, having shed its clerical leaders in a counter-revolution by 2020, emerges as a major economic power, taking in parts of Syria, Iraq, Azerbaijan and Afghanistan.
Gulf of Guinea Corridor: I find it hard to believe that an African country will not emerge as a major economic powerhouse by 2050. A federation of cities bestriding the Gulf of Guinea, stretching from Abidjan in Ivory Coast to Lagos in Nigeria, and possibly to Douala in Cameroon, could become a regional powerhouse.