It is always tempting to extrapolate current growth rates to figure out how global economy will be rebalanced in decades to come. With such method, an 8% growth rate over the next 40 years in China would produce a 21-fold increase of the Chinese economy by 2050. As for the European Union, a 2% growth rate would result in 121% economic growth over the same period. However, back-of-the-envelope calculations based on past trends can be extremely misleading.
 
In its recent publication, the CEPII is revisiting its projections for the world economy in 2050, projections first set out in 2010. The paper proposes a long-run growth scenario for 147 countries and a time horizon of 2050 relying on the model MaGE (Macroeconometrics of the Global Economy). The model is based on a three-factor production function of labour, capital and energy, and two forms of technological progress. It is fitted with demographic projections of the United Nations and the International Labour Office, and econometric estimations (of capital accumulation, savings rate, relationship between savings and investment rate, education, female participation, and technological progress.)
 
The study provides five improvements to the existing literature:

-The authors account for energy both as a constraint on production and a rent accruing to oil exporting countries.
-They estimate a non-unitary relationship between savings and investment, departing from assumptions of either a closed economy or full capital mobility.
-They disentangle real gross domestic product (GDP) growth rates from relative price effects.
-The authors account for the 2008-09 global crisis by initializing projections in 2013 while relying on IMF short-term forecasts between 2010 and 2012.

 
Results suggest that the Chinese and Indian economies could grow 8-fold between 2010 and 2050 at constant relative prices. Over the same period, the US and EU economies would inflate by 80-90%. When adjusting for relative prices, the Chinese economy reaches an 18-fold increase and India a 16-fold increase between 2010 and 2050. Therefore, China would represent 33% of the world economy in 2050, more than the United States (9%), India (8%), the European Union (12%) and Japan (5%) all together. China could overtake the United States by 2020 (or 2040 at constant relative prices). However, in terms of living standards measured as GDP per capita in purchasing power parity, China would still lag 10% behind the United States at the 2050 horizon. Finally, by 2040 Sub-Saharan Africa would become the most dynamic economic area, with an annual average growth rate beyond 5%.
 
Any exercise producing such long-term projections should be interpreted cautiously and considered tentative. This is particularly true in such period of crisis. However, the results are useful benchmarks for downstream studies on world commodity demand, international trade, financing capacity, global power, etc.



“The Great Shift: Macroeconomic projections for the world economy at the 2050 horizon”, CEPII Working Paper 2012-03, by Jean Fouré, Agnès Bénassy-Quéré & Lionel Fontagné, February 2012.
 
Written by Sophie Piton