Seven charts that show how the developed world is losing its edge 8/3/17, 22)19

The Big Read Global economic growth

Seven charts that show how the developed world is losing its edge

The gap between rich and poor nations narrows as the sources of dynamism in high-income economies slow, writes Martin Wolf

JULY 19, 2017 by: Martin Wolf

What is happening to the world economy? Here are some answers, in seven charts. They reveal a world undergoing profound
changes.

The most important transformation of recent decades has been the declining weight of the high-income countries in global economic
activity. The “great divergence” of the 19th and early 20th centuries, when today’s high-income economies leapt ahead of the rest of
the world in terms of wealth and power, has gone into remarkably rapid reverse. Where once there was divergence, we now see a
“great convergence”. Yet it is also a limited convergence. The change is all about the rise of Asia and, most importantly, of China.

Nothing better illustrates China’s advance than its huge savings. These are so large, partly because the economy has become so big
and partly because Chinese households and businesses save so much. It is likely that Chinese capital, capital markets and financial
institutions will become as influential in the world economy in the 21st century, as US capital, capital markets and financial
institutions were in the 20th century.

Emerging and developing countries have not only become increasingly important in world output, they are becoming increasingly
important in world population. The declining weight of the high-income countries is dramatic. By 2050, the share of sub-Saharan
Africa in the global population is forecast by the UN to be almost as large as that of all the high-income countries in 1950. The
challenges created by this shift in the world’s population towards its poorest countries are evident.

Economic convergence and shifts in population are central elements in the big economic picture. A third is technological change. The
convergence of data processing with communication has brought us the internet, the most important technology of our era. The
collapse in the relative cost of semiconductors underpins this technological revolution. Intriguingly (and worryingly), it seems to
have slowed.

The US has driven the global technological frontier outwards ever since the late 19th century. Robert Gordon, a professor of social
sciences at Northwestern University, has shown that the US economy has not matched the outstanding productivity it achieved
between 1920 and 1970. He also shows that the burst of productivity growth between 1994 and 2014, often attributed to the internet,
has ended in a period of extremely low productivity growth. Mismeasurement appears to explain at most only a small part of this
disturbing slowdown. Weak investment since the financial crisis is another partial explanation.

The world economy is not deglobalising. But the rapid growth of both trade and cross-border financial assets and liabilities, relative
to global output, has come to a halt. In the case of finance, plausible explanations are risk-aversion and re-regulation. In terms of
trade, the last significant act of trade liberalisation was China’s accession to the World Trade Organisation, which happened as long
ago as 2001. Many of the opportunities afforded by the cross-border integration of supply chains may also by now have been
exhausted.

Rapid change in relative economic power and huge shifts in the relative size of populations shape our world. At the same time, the
sources of dynamism — technological change, productivity growth and globalisation — are slowing, to a worrying degree. One result,
powerfully reinforced by the crisis, has been real income stagnation in many high-income countries.

Rising populist pressure across the high-income economies makes managing these shifts far more difficult. Among the most

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significant developments is flat or falling real incomes since the financial crisis. Up to two-thirds of the population of many high-
income countries seem to have suffered flat or falling real incomes between 2005 and 2014. It is little wonder so many voters are
grumpy. They are neither used to this nor wish to become used to this.

Profound shifts — Seven measures of change

Output Between 1990 and 2022, the high-income countries’ share of world output, measured at purchasing power parity, is forecast
by the International Monetary Fund to fall from 64 per cent to just 39 per cent. Remarkably, Asian emerging and developing
countries account for the entirety of the rise in the share of emerging and developing countries: thus, the share of Asian emerging
and developing countries is forecast to rise from 12 per cent to 39 per cent of the world total over this period.

By 2022, the share of Asian emerging and developing countries in world output is forecast to be the same as that of the high-income
countries. The rise of China is the principal reason for this dramatic shift in relative economic power, though India’s rise is also
significant. China’s share in world output is forecast to jump from 4 per cent in 1990 to 21 per cent in 2022. India’s share is forecast
to climb from 4 per cent to 10 per cent.

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Savings China’s gross savings (at market exchange rates) are nearly as large as those of the US and EU combined. China saves
almost half of its national income. This extraordinarily high share is likely to fall but that decline is set to be gradual, since Chinese
households are likely to remain frugal and the share of profits in national income is likely to remain high.

Population Between 1950 and 2015, the share of the current high-income countries in the world’s population tumbled from 27 per
cent to 15 per cent. Even China’s share fell, from 22 per cent in 1950 to 19 per cent in 2015. India is forecast to be the world’s most
populous country by 2025. Sub-Saharan Africa’s share is forecast by the UN to reach 22% of the total by 2050.

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Technology The collapse in the price of semiconductors is the driving force behind the revolution in communications and data
processing. The relative price of information processing, measured in this way, has declined by almost 96 per cent since 1970. The
slope of the line on the logarithmic scale shows the rate of relative price decline — this slowed drastically after 2010.

Productivity The economist Robert Gordon has revealed that US productivity performance between 1920 and 1970 (as indicated
by the growth of “total factor productivity” — a measure of the growth of output per unit of inputs) has not been matched since. He
also shows that the upward burst between 1994 and 2014 subsequently petered out in a period of extremely low growth of
productivity.

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Globalisation The rapid growth of both trade and financial assets and liabilities, relative to global output, halted after the financial
crisis. Protectionism may be part of the reason for this, but it does not seem to be the dominant factor. The exhaustion of many
trading opportunities, slowing pace of liberalisation and weak investment appear to explain this slowdown.

Income About two-thirds of the population of 25 high-income countries suffered flat or falling real incomes from wages and capital
between 2005 and 2014, according to an analysis released in July 2016 by the McKinsey Global Institute. Such stagnation was
particularly widely shared in Italy and the US.

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