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Global Economics Paper No: 153

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Goldman Sachs Economic Research                                                                               Global Econo...
Goldman Sachs Economic Research                                                                                           ...
Goldman Sachs Economic Research                                                                                       Glob...
Goldman Sachs Economic Research                                                                                           ...
Goldman Sachs Economic Research                                                                                           ...
Goldman Sachs Economic Research                                                                                      Globa...
Goldman Sachs Economic Research                                                                             Global Economi...
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Goldman Sachs Economic Research                                                                             Global Economi...
Goldman Sachs Economic Research                                                                                          G...
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
Goldman Sachs' Next - 11 Frontier Markets
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Goldman Sachs' Next - 11 Frontier Markets

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Updated presentation of Goldman's Next 11 concept. Created in 2005 by Jim O'Neill, GSAM's Chief Economist.

The concept is important when analyzing Frontier Markets.

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Transcript of "Goldman Sachs' Next - 11 Frontier Markets"

  1. 1. Global Economics Paper No: 153 GS GLOBAL ECONOMIC WEBSITE Economic Research from the GS Institutional Portal at https://portal.gs.com The N-11: More Than an Acronym ■ Since we introduced the notion of the N-11 in late 2005, there has been increased focus on these countries (Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam). ■ Recent economic performance has improved and equity markets have been strong. ■ While the N-11 may not have the scale to have a ‘BRIC-like’ impact, they could rival the G7. ■ As a source of new demand and sustained growth, they could surpass major markets. ■ Several of the N-11 could perhaps join the largest economies in the world. ■ Growth conditions vary widely across the N-11, and several face large challenges. ■ Growth stories could be much more compelling in places if conditions improved. ■ As a group of potentially large, fast-growing markets, the N-11 could be an important source of growth and opportunity. Important disclosures appear at the back of this document Thanks to Jim O’Neill, Sandra Lawson, Dominic Wilson and Anna Stupnytska Tushar Poddar, Ashok Bhundia, Pablo Morra and Salman Ahmed for advice and comments. March 28, 2007
  2. 2. Goldman Sachs Economic Research Global Economics Paper The N-11: More Than an Acronym 1. The N-11 Dream might be realised. That is why we labelled our original Late in 2005, we introduced the concept of the Next BRICs projections a ‘dream’ and why we have focused so Eleven (N-11). Our purpose was to identify those much on benchmarking growth conditions. For several of countries that could potentially have a BRIC-like impact the N-11, that hurdle is even higher. But it is precisely in rivalling the G7. Their main common ground—and the this uncertainty—and the fact that some of these reason for their selection—was that they were the next set economies lie well off traditional radar screens—that of large-population countries beyond the BRICs. The makes parts of the N-11 so intriguing. If some of these result was a very diverse grouping that includes economies can defy sceptics and take concrete steps Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, towards addressing areas of weakness, their growth could Nigeria, Pakistan, Philippines, Turkey and Vietnam— be much higher. While the grouping may seem less some economies that are well-known to many investors coherent (indeed is less coherent) than the BRICs, this (such as Korea and Mexico) but also many that are not potential—and perhaps the diversification offered by their (such as Nigeria, Vietnam, Pakistan and Bangladesh). many differences—makes them an interesting group from an investment perspective. With the BRICs story now well-known—and perhaps in places also increasingly well-priced—we continue to be Our GES suggest that concrete progress so far is uneven asked about the prospects for this next group of countries. and modest, although several N-11 members have made Solid recent performance and some moves towards their desire to move down this path clearer in the past reforms have begun to pique investors’ interest even in year or two. They may not succeed, but they do merit the less-well-followed members of the group. closer attention as a result. Our focus here is less to ‘pick winners’ and more to provide a road-map for assessing What are the prospects for the N-11 over the next few the kind of growth that each of the N-11 could deliver and decades? Can the N-11 ‘dream’ become reality? What are the problems that need to be addressed to get there. the obstacles to success, and what would need to change to make success more likely? We aim to answer these In gauging the chances of success, we are conscious that questions—which we hear increasingly—in this paper. the recent global picture—high commodity prices, low real interest rates, solid global growth and low market We take a similar approach to our 2003 BRICs analysis, volatility—has been unusually favourable for emerging looking in detail at what some simple assumptions for the markets. Until this environment is tested, it will be hard to growth process imply for the N-11 economies, and know whether the recent optimism about some of these benchmark these against the BRICs and the G7. We also economies represents a fundamental sea-change or a compare growth conditions, using our Growth cyclical boom. For the N-11, improving growth Environment Scores (GES), highlighting the strengths conditions while the global backdrop is benign is likely to and weaknesses across the group. offer the best chance of weathering the next storm, whenever it comes. The diversity of the N-11 makes it difficult to generalise. But our projections confirm that many of them do have 2. Highlights of the N-11 Dream interesting potential growth stories, alongside reasonable Below, we look at the N-11’s recent performance, the scale, although their prospects vary widely and some face projections for an N-11 dream, their growth conditions much greater challenges than others. and the potential for change. Here, we summarise some of the key highlights: There is no question that the BRICs remain by far the bigger global story. Of the N-11, only Mexico, Korea and, to a lesser degree, Turkey and Vietnam have both the Recent Performance potential and the conditions to rival the current major ■ The N-11’s weight in the global economy and global economies or the BRICs themselves. Other N-11 trade has been slowly increasing, with a contribution to economies—Indonesia and Nigeria in particular—have global growth of around 9% over the last few years. the scale to be important if they can deliver sustained growth. But while the rest of the N-11 may not have a ■ Only Vietnam has managed growth comparable to BRIC-like impact any time soon, the N-11 as a group China, Russia and India, but five of the N-11 have may have the capacity to rival the G7—if not in absolute averaged 5%-plus growth over the last five years. terms, then at least in terms of new growth. And many of ■ Growth has generally risen across the group. Recent them could still deliver the kind of sustained growth growth performance has been quite stable and stories in sizable markets that will be increasingly hard to dispersion in growth is the lowest in 20 years. find in the developed world. ■ Equity market performance has varied: five of the N- As with our BRICs projections, we are conscious of the 11 have seen gains of more than 300% since 2003, leap of faith that is needed to believe that this potential Issue No: 153 2 March 28, 2007
  3. 3. Goldman Sachs Economic Research Global Economics Paper The BRICs, N-11 and the World Russia . . Turkey China Korea Egypt Iran Mexico Pakistan India Bangladesh Vietnam Philippines Nigeria Brazil Indonesia BRICs N-11 Ov ertaking the G7: W hen BRICs' and N-11's GDP W ould Exceed G7 France Germany Japan US China Canada Italy France UK Germany Japan India Canada Italy France UK Germany Japan Brazil Canada Italy France UK Germany Japan Mexico Canada Italy France UK Germany Japan Rus s ia Canada Italy France UK Germany Japan Indones ia Canada Italy France Nigeria Canada Italy Korea Canada Turkey Italy Canada Vietnam Italy Philippines 05 08 11 14 17 20 23 26 29 32 35 38 41 44 47 50 Note: Cars indicate w hen BRICs and N-11 US$GDP exceeds US$GDP in the G7. The N-11 countries not included in the chart do not overtake any of the G7 countries over the projection horizon. Source: GS Issue No: 153 3 March 28, 2007
  4. 4. Goldman Sachs Economic Research Global Economics Paper GD P 2006 US$ bn N-11 Catch up with G7, Not BRICs 2006 US$ bn N-11 Incremental Demand Could 140,000 Be Twice G7 Demand by 2050 7,000 120,000 N-11 6,000 N-11 100,000 BRICs BRICs 5,000 G7 G7 80,000 4,000 60,000 3,000 40,000 2,000 20,000 1,000 0 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: GS Source: GS with Vietnam up a spectacular 500% since 2003 (albeit Growth Conditions and GES in a very heavily concentrated index), but risk premia ■ The capacity to deliver on this growth potential—and remain high in several places. underlying growth conditions—varies greatly across the N-11. Korea rates higher than most developed ■ There has been a sharp increase in openness to trade in countries, including the US, while Bangladesh, Nigeria several of the N-11 over the last five to ten years, and Pakistan rank in the lowest third of all countries. particularly in Vietnam, Egypt and Turkey. ■ Of the N-11, only Korea and Mexico (and to a lesser N-11 Growth Prospects extent Turkey and Vietnam) appear to have both the ■ Although the N-11 is unlikely to rival the BRICs as a potential and conditions to rival the current major grouping in scale, N-11 GDP could reach two-thirds economies. the size of the G7 by 2050. ■ Korea and Mexico—unsurprisingly as OECD ■ All of the N-11 have the capacity to grow at 4% or members—are the only economies where most more over the next 20 years, if they can maintain stable components of our GES are above the developing conditions for growth. country mean. Bangladesh, Pakistan and Nigeria have broad and systematic issues across a range of areas. The ■ Incremental new demand from the N-11 could other economies generally have specific areas of conceivably overtake the G7 in around 25 years and be weakness that they need to address to achieve their twice that of the G7 by 2050, so their growth potential. contribution will rise faster. Potential for Change and Growth Bonuses ■ Of the N-11, only Mexico and Indonesia have the ■ Within the N-11, Vietnam is the closest to ‘Best in Class’ potential to rival all but the largest of the G7, but levels of the GES, while Nigeria is the furthest away. Nigeria, Korea, Turkey and Vietnam might all overtake some of the current G7. ■ While many N-11 governments appear more focused on enhancing growth conditions, hard measures such ■ Even with solid growth, only Korea and Mexico (and as the GES have not yet captured significant broad perhaps Turkey) are likely to have a reasonable chance progress, except in Turkey (and to a lesser extent Iran). of catching up to developed country income levels over the next few decades. And the ranking of income ■ Since our projections account to some extent for levels is less likely to change than the ranking of current growth conditions, significant progress in economic size. improving growth conditions could lead to substantial growth bonuses in some places beyond these ■ Other N-11 countries could still see large rises in projections. This bonus could be as much as 3%-4% in incomes, with Vietnam potentially the most Bangladesh, Nigeria and Pakistan. spectacular, with a more than fivefold increase possible in the next 25 years. ■ These changes would be enough to alter the path of the projections, perhaps dramatically. With a significant ■ The shifts towards current developing economies and improvement to growth conditions, for instance, both towards Asia, currently driven by the BRICs, are likely Nigeria and Indonesia would possibly rival the smaller to be reinforced if the N-11 dream becomes reality. of the BRICs over time. Issue No: 153 4 March 28, 2007
  5. 5. Goldman Sachs Economic Research Global Economics Paper Diversity Within The N-11 As the tables below show, the N-11 are a diverse group ■ Levels of urbanisation, openness to trade and the on many levels: role of FDI in the economy also vary markedly, with the less developed economies showing a strong rural ■ Broad representation across major regions, with bias and direct foreign involvement in the economy one economy each from Europe, Latin America and ranging from non-existent (Iran) to significant the Middle East; one from Latin America; two from (Nigeria and Vietnam). But trade shares are generally Africa; two from the Sub-Continent; and four from quite high at 60% of GDP in 2005. Four economies East and South-East Asia. The map on page 3 shows boast higher trade shares than China—the most open the pattern of the N-11 and BRICs, highlighting the BRIC. concentration in Asia. ■ Population size is also quite different across the ■ Huge variation in development levels. Korea group. While all of the N-11 are (by design) relatively (although classified as an emerging market in large, and none rivals China or India, populations vary financial terms) is in most respects a developed from around 50 million for Korea to well over 200 economy, with income levels more than twice as high million for Indonesia. as any of the N-11 countries. Along with Mexico, the next richest, it is already an OECD member. Turkey ■ Market development and investor focus also differ. too is quite well-off by developing standards. By While five of the N-11 (Turkey, Korea, Indonesia, contrast, Bangladesh is one of the world’s poorest Philippines and Mexico) are commonly found in countries. Emerging Market investment indices, the other six generally attract much less interest. The ability to access the markets also varies widely. BRICs and N-11 2006 Economic Snapshot 2001-06 Trade Current GDP Average GDP GDP Per Capita Urbanisation FDI (% Inflation Population ( mn) openness (% Account (US$bn) Growth Rate (US$) (% Total)* GDP)* (% yoy) GDP)* (% GDP) (%) Bangladesh 63 5.7 427 155 25.0 36.7 1.1 -0.3 6.8 Brazil 1,064 2.3 5,085 187 84.2 22.7 1.7 1.4 4.2 China 2,682 9.8 2,041 1,314 40.5 63.4 3.2 8.6 1.5 Egypt 101 4.2 1,281 72 42.3 56.8 6.4 1.8 7.3 India 909 7.2 696 1,110 28.7 29.3 0.8 -2.4 5.6 Indonesia 350 4.8 1,510 222 47.9 51.2 1.9 2.4 13.1 Iran 245 5.7 3,768 71 68.1 51.5 0.0 10.0 14.0 Korea 887 4.5 18,484 49 80.8 68.5 0.9 0.7 2.2 Mexico 851 2.3 7,915 107 76.0 57.4 2.3 -0.4 3.6 Nigeria 121 5.6 919 150 48.3 71.9 3.4 15.7 9.4 Pakistan 129 5.3 778 155 34.8 35.5 2.0 -3.9 7.9 Philippines 117 5.0 1,314 86 62.6 90.7 1.2 3.1 6.3 Russia 982 6.2 6,908 142 73.3 44.2 1.9 10.3 9.9 Turkey 390 4.6 5,551 73 67.3 51.8 2.7 -8.0 10.2 Vietnam 55 7.6 655 84 26.7 132.2 3.9 0.1 7.6 * 2005 data; ** Latest reported Source: IMF, World Bank, UN, GS BRICs and N-11 Markets Snapshot FX Local Equity Market MSCI 12- Deposit Rate**, Market Cap Reserves Currency/USD Indices (Jan Month % (US$ bn)**** (US$bn)* (Jan 03=100) 03=100)*** Forw ard PEs Bangladesh 3.7 119 8.1 218 na na Brazil 90.8 60 17.6 401 8.6 644 China 1,066.3 94 2.3 356 15.5 390 Egypt 23.2 106 7.2 376 14.0 na India 173.1 93 5.5 398 16.9 601 Indonesia 40.7 103 8.1 444 12.3 120 Iran na 116 11.8 na na na Korea 233.7 80 3.7 227 10.8 659 Mexico 75.9 101 3.5 447 13.3 328 Nigeria 42.4 100 10.5 306 na na Pakistan 11.2 104 7.0 439 10.2 42 Philippines 19.9 90 5.6 315 16.3 68 Russia 295.3 82 4.0 538 11.1 866 Turkey 63.0 86 20.4 407 10.1 153 Vietnam 11.9 104 7.1 660 na na * Latest reported; **End 2005; *** Local Headline Indices except China w here MSCI is used; **** Using Datastream Equity Indices Source: IMF, World Bank, Bloomberg, Datastream Issue No: 153 5 March 28, 2007
  6. 6. Goldman Sachs Economic Research Global Economics Paper 3. A Good Patch For N-11 Performance but dispersion in growth across the group has fallen When we conceived the notion of the N-11 grouping in sharply, to its lowest levels in decades. late 2005, our goal was to identify other countries that The improved economic performance extends beyond the might have the kind of potential for global impact that the growth picture. Inflation has fallen in many of the N-11, BRICs projections highlighted (essentially an ability to sharply in some cases, and most of their current accounts match the G7 in size). As a result, the main criterion was are now in surplus. There has also been a marked pick-up demographic—without a large population, even the best in integration with the world economy in some countries. growth stories are unlikely to have meaningful regional or For instance, trade openness in Vietnam, Egypt, Turkey global impact. The result is that the N-11 is essentially a and Pakistan has increased significantly over the past group of many of the large-population, developing several years, with the most striking change in Vietnam, economies outside the BRICs themselves. The list whose share of trade in GDP has risen more than 35 includes Bangladesh, Egypt, Indonesia, Iran, Korea, percentage points since 2000. The latter three countries Mexico, Nigeria, Pakistan, Philippines, Turkey and have also seen a pronounced rise in FDI shares, together Vietnam. Population and potential size are the key with Indonesia. common feature across the group. Behind that, they are a diverse group on many dimensions, including regional As a result of these shifts, the N-11’s weight in the global representation, population size, level of economic and economy has slowly increased. Their share in global GDP market development, and integration with the global has edged up to 7% today, up around 1 percentage point economy. (See the box on the previous page for a detailed since the beginning of this decade, and, between 2000 and discussion of these differences.) 2006, the N-11 on average contributed just over 9% to global growth in USD terms. Korea accounted for almost Despite these variations, we have found generally of third of this, with Mexico, Indonesia and Turkey each increased investor focus across this group of countries, accounting for over 1 percentage point of the total even in those that have not been in the spotlight much contribution. The N-11 share in global trade has also until recently, such as Vietnam, Nigeria and Pakistan. grown a touch in the past several years, surpassing 8% in This increased focus partly reflects a period of better 2005, and their share in global FDI has risen steadily economic performance across the group. Over the last since 2003, reaching 6% of total world flows in 2005. three years, GDP growth across the N-11 has averaged While these shifts are generally less dramatic than for the 5.9%, the strongest in 15 years. And while only BRICs, they do show that the last few years have been a Vietnam’s growth rivals the three fast-growing BRICs period of slowly rising influence. (China, India and Russia), six of the N-11 have managed more than 5% growth over the past five years. Reflecting improved economic fundamentals, N-11 equity markets have generally performed well. Market breadth This represents a step up from previous years. Comparing and depth differ enormously, but eight of the 10 that have the last five years to the decade before, eight of the 11 functioning equity markets have seen gains of more than (Korea, Mexico and Vietnam are the exceptions) have 200%, with several delivering ‘BRIC-like’ returns over delivered higher growth more recently. Performance has the period. Vietnam has the best performing local also been more reliable and more uniform than in the headline index: it has risen dramatically by over 500% past. Not only has the volatility of growth fallen recently, since 2003, outperforming all of the BRICs. For many of N-11 Markets Development N-11 Equities Interest Rates FX Bangladesh Illiquid Illiquid Illiquid Egypt Fast developing market but still low liquidity Treasury borrows regularly but liquidity is Developing market. Set up a unified FX market relatively low only recently. Indonesia Relatively liquid/easy access except for Relatively limited liquidity Certain controls in place but capital account strategically important sectors relatively open. Iran Limited liquidity. Foreign access restricted None Capital controls, severe restrictions Korea Liquid Liquid Liquid Mexico Liquid Very liquid Very liquid Nigeria Limited market size and liquidity Limited t-bill market Capital account control limit liquidity/has parallel FX market Pakistan Fairly Liquid Relatively limited liquidity, but reforms Certain restrictions in place but capital underway account relatively open Philippines Relatively limited liquidity Relatively limited liquidity Capital restrictions in place but recently announced further reforms/liberalisation of regulations Turkey Good market size and good liquidity Good market size and fairly high liqudity Developed, open market, very liquid Vietnam Limited liquidity/access Limited access/liquidity Limited liquidity. Capital controls in place. Source: National sources, GS Issue No: 153 6 March 28, 2007
  7. 7. Goldman Sachs Economic Research Global Economics Paper % The N-11 Has Contributed Almost 10% to Eight of the 11 Have Delivered % yoy Global Growth Since 2000 Higher Real Growth Recently 3.5 8 2000-2006 Growth Contribution 7 1991-2000 3.0 (US$ terms) 2001-2006 2.5 6 5 2.0 4 1.5 3 1.0 2 0.5 1 0.0 0 Vi ria sh ea sia ilip n ey Ni t ng m n P es In ico Pa eria h M a sia n Vi ey m do t yp ilip a n Tu s Ni o Ph Ira ta yp Ira es re Ba tn a ne ge de rk ic or n na ne rk Eg ex ne t is Eg Ko pi ex kis ad Tu g K pi la ak e et do M l ng In Ph Ba Source: GS calculations Source: IMF, GS % % N-11 Growth: Higher and More Uniform BRICs and N-11: Rising Shares of Global World 25 Output 14 Average Median GDP in current US$ s hare of world GDP 20 BRICs Max Min 12 15 N-11 N-11 ex Korea 10 10 BRICs ex China 5 8 0 6 -5 -10 4 -15 2 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Source: IMF, GS calculations Source: IMF, GS calculations % GDP N-11 Are More Open Than BRICs Index, Jan Equity Market Performance Has Been 03=100 70 Spectacular in Most Countries N-11 Trade Share of GDP 700 60 BRICs 600 Equity Market Local Headline Indices* BRICs ex China 500 50 400 40 300 200 30 100 20 0 do a Pa i a R es na Ko a Tu ia t N o pp n Vi e y C l M a m h i yp In n d i az Ph is ta si re es ic er s na in rk hi ne us ex Eg 10 Br ig d I et k la i li ng 92 93 94 95 96 97 98 99 00 01 02 03 04 05 * Except China w here MSCI is used Ba Source: IMF, GS calculations Source: Haver, Bloomberg, Datastream Issue No: 153 7 March 28, 2007
  8. 8. Goldman Sachs Economic Research Global Economics Paper the N-11, though, multiples remain lower, so markets allows us to make consistent and integrated projections trade at a discount to the developed markets and, in for the path of growth, incomes and the currency. general, to the BRICs (with the exception of Brazil). One innovation in the latest projections is that we use our Of course, this improved performance and the key measure of growth conditions (Growth Environment ingredients—robust growth, falling inflation, reduced Scores, GES) to generate our assumptions on the speed volatility, strong equities—are part of a broader story of with which productivity catch-up will take place, at least the emerging economies, and a reflection of an economic in the initial stages of the process. We have accounted for landscape that has been generally very favourable. So, the differences in conditions in each economy in the past by degree to which performance has been distinctive relative allowing for different assumptions about the speed of to emerging markets in general varies across the group. catch-up in productivity. As the Appendix explains, we Nor does the recent success tell us that this performance now pin that link down more precisely. is sustainable. We turn to that issue now. The charts and tables on pages 9 and 11 capture the main 4. N-11 Projections: Sustained Growth... results, while the tables in Appendix II provide more In our 2005 paper, we looked briefly at the growth and detail. Our updated projections once again reinforce our GDP projections for the N-11 and compared them to the original conclusions about the special quality of the BRICs and the G7. We update that exercise in more detail BRICs dream. As before, China would still be the largest here, and in the process update our BRICs and G7 economy in 2050, followed by the US and India, and the estimates for the latest data. BRICs are now all projected to be in the top five (recent revisions to Brazil’s GDP data have helped). The latest We are often asked how to interpret these projections. As data shows the BRICs themselves overtaking the G7 we have said on many occasions, these are not ‘forecasts’ somewhat faster than usual, reinforcing our view that the but rather a look at what might happen under reasonable BRICs ‘dream’ that we set out in 2003 is still the biggest assumptions if these economies can stay on their current potential story. And both in China and India, our paths. As before, we use a simple model of growth as a economists think the path may well be faster than our function of growth in the labour force, capital projections (see box below). accumulation and a process of convergence in technology with the developed markets that drives productivity Although as a group the N-11 will not plausibly overtake growth performance. While the model is a simple one, it the BRICs or G7 in GDP terms even over long horizons, Revised BRICs Projections In the process of updating, we have also revised our or 20 years) may still not be optimistic enough. For BRICs projections for the latest information and the instance, Tushar Poddar’s latest work on India suggests closer links between conditions and convergence speeds. that the economy’s sustainable growth rate might be While our focus here is on the N-11, we detail some of around 8% until 2020 (not the average of 6.3% in our the main changes here, given the large amount of projections) and that India could overtake the US before attention the BRICs projections have received. 2050 (see Global Economics Paper No. 152 ‘India’s Rising Growth Potential’, January 22, 2007). In general, the new projections show the BRICs as a group growing more rapidly than before. As a result, Our projections could be seen as conservative, as our China surpasses the US earlier (2027 vs 2035) and country economists for both China and India currently overtakes more dramatically than before (by 2050 it is believe. However, over a time span as long as the one we projected to be 84% larger rather than 41% before), have used, there will likely be surprises in both while India too essentially catches up with the US by directions. As a broad cross-country comparison, it is 2050, where before it was projected only to reach 72% of also important to stick to a transparent and consistent the US economy. Both Russia and Brazil’s projections framework across the different groups. are also somewhat higher. The advantage of this approach is that it makes results The BRICs as a group now pass the G7 in 2032 rather clear and comparable. The disadvantage is that no simple than 2040. Stronger recent performance, the recent framework will ever take into account all the specific upward revisions to Brazil’s GDP (which show the factors that a country expert might see. Looking at those economy there now around 11% higher than previously specific factors, our ‘official’ Chinese and Indian recorded) and somewhat more optimistic assumptions forecasts from our economists for the next decade or two about productivity growth are the main contributors. would likely be higher than the projections offered here. Our goal is not to provide an explicit forecast (a task we Although the BRICs projections have become more leave to our country economists), but rather to provide a optimistic as a result, our regional economists—at least reasonable way of benchmarking potential across a large for China and India—continue to produce work that group of economies. suggests that their growth paths (at least over the next ten Issue No: 153 8 March 28, 2007
  9. 9. Un ite Un d 0 2,000 4,000 6,000 8,000 10,000 12,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Ch 0 5,000 10,000 15,000 20,000 25,000 Br ite St Issue No: 153 az d in at a es M il St at Ch ex es in GDP 2006 US$ bn GDP 2006 US$ bn GDP 2006 US$ bn ic o In a Ru Ja ss di pa In i Br a n do a a I Goldman Sachs Economic Research ne M z il G ndi er a Un si a ex ic m ite Ja Un an Ru o d pa ite Ru y Ki n I n ss i d s ng do a K i s ia d ne ng G om Un si a do er ite m d J ap Fr m an an Ki a ng n ce Ni y Br ge ri G do az er m il Fr a m an an I ta ce Ni y ge M ly ex Ko 9 Fr ria ic o re an Ko Tu a ce r rk Ko Ca e a V i ey re In na et Tu a do da na m r ne s The World in 2025 The World in 2050 Ca V i key et T u ia P h na d na rk i l ip a Ca m ey pi P h na I ne s i li p d a pi V i ran et ne na I ta s ly Ni m The World in 2050 (ex China, US and India) I ta Ph g e I ra ly ilip ria n I ra pi Eg P a ne s yp Eg n kis Pa t ta kis P a yp t n Ba ta B a kis Ba Eg ng n ng ta n ng yp la la la t de de de sh sh sh March 28, 2007 Global Economics Paper
  10. 10. Goldman Sachs Economic Research Global Economics Paper the next few decades could still bring about some crucial 5. ...and Rising Incomes changes. In particular, by 2050 the N-11 could also go a The projections paint a very different picture for the long way towards catching the developed countries— pattern of average incomes globally. As before, the US growing from just over one-tenth of G7 GDP today to may still be the wealthiest of the large economies in 2050 around two-thirds over the next several decades. and all G7 economies may remain in the top 10. And while we still project the BRICs to dominate, several The N-11 could also see a substantial rise in incomes. of the N-11 countries will also move closer to the top. Incomes are generally projected to more than double in Since small differences in projections across countries the next 20 years, with a spectacular sixfold increase should not be taken too seriously, it is helpful to think of potentially in Vietnam. But here too, the lesson that it is them in groups. Looking at the snapshot for 2050, we can harder to break the status quo also stands. distinguish three broad groups that the countries fall into according to our projections: Of the N-11, only Korea appears to have the capacity to catch up more or less completely in income terms with ■ Countries that could overtake the bulk of the G7 by the richest economies over the next few decades. Helped 2050. On our projections, both Mexico and Indonesia by a relatively high starting point, its demographic profile fall into that category, with the capacity to maintain or and robust growth, it is projected to continue to have reach sizes comparable to Russia and Brazil. Although much the highest income of the group (as it is now), while on the current projections Indonesia still stands slightly Mexico and Turkey are also projected to remain the behind Japan, only the US of the current G7 would be second- and third-richest economies. And within the rest clearly larger than these two N-11 economies. of the N-11, only Vietnam’s strong projected growth could drive it sharply up the income rankings within the ■ Countries that could overtake some of the G7 N-11. members. Nigeria, Korea, Turkey and Vietnam all have the potential to overtake some of the current G7 Looking across all the countries, the projections imply members, with Nigeria potentially the largest of this four main groups: next group. ■ The ‘rich’ club. This group, with incomes of $65,000 ■ The rest, which do not catch up with the developed or more, would include six of the G7 countries (ex world. This group includes all other N-11 countries Italy), Russia from the BRICs and only Korea from the that are unlikely to grow large enough to challenge N-11 countries. A literal reading of the projections even the smallest of the G7 countries and would thus places Korea towards the top end even of the current continue to contribute quite modestly on a global basis. developed country group. However, they may ultimately have the potential to become similar to the smaller of today’s G7 in terms of ■ Upper middle income group. These are countries size. This group comprises Philippines, Iran, Egypt, whose incomes surpass the current US level but do not Pakistan and Bangladesh. join the ranks of the very richest, with incomes between $40,000 and $65,000. They would include While only a couple of the N-11 appear to have the Italy, Mexico, two BRICs countries (China and Brazil) potential to move into the very largest group of and Turkey. Given that its 2050 income is projected to economies, the growth stories in many of the others still be in line with current US levels, Turkey could be the look quite striking. With the right growth conditions, the richest N-11 country not currently in the OECD. N-11 generally have the capacity to deliver continued strong growth, with all of the projections pointing to ■ Lower middle income group. This group, with average growth rates over the next 20 years of over 4%. incomes between $20,000 and $40,000, would include Vietnam, Nigeria and Bangladesh show particularly many of the N-11. Vietnam and Iran have the potential strong potential growth profiles, although as we will to become as rich as Germany today. Indonesia, Egypt, discuss shortly the capacity to sustain them is probably Philippines and India might become as rich (or even quite different across the group. richer) than the richest N-11 country today, Korea. As large and growing markets, relative to a slowing ■ The low-income group. With incomes below $20,000, developed world, these economies could offer greatly this group would include Nigeria, Pakistan and increased opportunities if ‘dream’ becomes reality, even if Bangladesh—the only N-11 economies that are not their global impact is unlikely to challenge the BRICs. As projected to reach the levels that qualify for ‘high- a source of new demand, they could become important income’ status even at today’s income levels. quickly. Although the BRICs story remains larger, the However, Nigeria’s income is projected to be more annual increase in the size of the N-11 (and so their than twice that of the other two countries. Even if they contribution to incremental demand) is projected to exceed only make partial progress towards catching their the G7 in 2033 and be twice it by 2050. So, as a source of peers, their projected incomes would still be much new growth opportunities, they could potentially be very higher than current low levels. important as developed market growth slows. Issue No: 153 10 March 28, 2007
  11. 11. Goldman Sachs Economic Research Global Economics Paper 2006 US$ Income pe r Capita in 2025 60,000 50,000 40,000 30,000 20,000 10,000 0 Ni a n Ru e a V i I ran Tu a P a eria F r da ey t ilip sia Ko y C h il Ja e M ia ic o sh y In tn am ng ta n Eg s Ki e s C a om yp di G pa l in c az an ne I ta ss rk r an na In de Ph n e d t at ex Br B a ki s g d m pi ng e la do ite S er Un ited Un 2006 US$ Income per Capita in 2050 100,000 90,000 The 'rich' club 80,000 Upper middle income group 70,000 60,000 Lower middle income group 50,000 40,000 Low income 30,000 group 20,000 10,000 0 K i re a M n a n Tu a P a eria F r da V i key i l i p yp t si a ly Ch i l C a ia er e ic o sh y m ng ta n Ni es Ru m Ko s pa di I ra in G nc az an I ta e ss na do na In de n ne at Ph Eg ex Ja r Br B a ki s a g m pi et St ng la do d In ite d Un ite Un Ranking the N-11 Today and in 2025 2006 GDP 2025 GDP 2006 Income per capita 2025 Income per capita Average Grow th GES US$ bn Ra nk US$ bn Rank US$ Ra nk US$ Ra nk 2001-06 2007-2025 Index Rank Korea 887 1 1,861 2 18,161 1 36,813 1 4.5 3.4 6.9 1 Mexico 851 2 2,303 1 7,918 2 17,685 2 2.3 4.3 4.6 2 Turkey 390 3 965 4 5,545 3 11,743 3 4.6 4.1 4.0 5 Indonesia 350 4 1,033 3 1,508 5 3,711 6 4.8 4.7 3.4 8 Iran 245 5 716 5 3,768 4 9,328 4 5.7 4.2 4.4 4 Pakistan 129 6 359 9 778 9 1,568 10 5.3 5.0 3.1 10 Nigeria 121 7 445 7 919 8 2,161 9 5.6 5.8 2.7 11 Philippines 117 8 400 8 1,312 6 3,372 7 5.0 5.1 3.6 7 Egypt 101 9 318 10 1,281 7 3,080 8 4.2 5.0 3.7 6 Bangladesh 63 10 210 11 427 11 1,027 11 5.7 5.1 3.2 9 Vietnam 55 11 458 6 655 10 4,583 5 7.6 7.2 4.5 3 Source: GS Issue No: 153 11 March 28, 2007

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