The magic moments of the 21st century?

I’ve been thinking about the comment of Mohit, that I haven’t answered yet.

One of the threads, along which I was thinking, eventually brought me to the idea that there will be what you might call a magic moment in the early 21st century. It will happen when the GDP of the current OECD countries equals the GDP of the rest of the world. This doesn’t sound like much of an achievement, once you keep in mind that the rest of the world will have about six times as many people as the OECD by that point – but that changes when you know that until 2003 the GDP of the OECD was six times greater than that of the rest of the world.

Have a look at the speed at which this is happening now. Between 1990 and 2003 (and probably before that), the ratio was basically a constant. The OECD made up about 83% of world GDP. (The up-tick after 1997 was probably the fallout of the Asian Financial Crisis.) But between 2003 and 2008 the ratio that never changed plunged from 83% to 72%. That’s huge.

Those five data points leading the downward trend are 2004, ’05, ’06, ’07 and ’08. Only the last of those points was at a time of recession in any of the OECD countries, which clocked in their regular growth rates during the remainder – and it barely makes a difference. There is nothing to suggest anything changed to stop this trend.

Now, I can practically feel some people’s fingers twitching, asking why didn’t I use GDP at purchasing power parity? Well, it is because PPP was introduced as a measure to compare the economic performance or the wealth of two countries and get a bit closer towards a measure of quality of living. In this case, the gap would be smaller.

But that’s not what I want to do here. What I am getting at, is that you can use nominal GDP ratios at exchange rate as a crude measure of something you may call the mutual trading potential. It’s all good and fine that you may buy something for the equivalent of $150 per month in India that would cost the equivalent of at least $450 in the USA and ff the same is true for all other prices and products, you would have to multiply nominal GDP at exchange rate by a factor of three to compensate and compare the USA to India.

But that doesn’t change the fact that trading occurs at other exchange rates. Trade is always limited to the amount of currency you can actually expect to gain out of those trades. An American selling something to India can’t expect to get a lot of money – because his costumers don’t have a lot of money to begin with.

But in a free market environment, an Indian company can’t expect to gain a lot of money by selling stuff to Americans either. Because if an Indian company were to sell its wares to the USA too far above what they cost to produce, then another Indian company could undercut their prices and still make more profit than on their domestic Indian market.

In perfect competition, Indian producers wouldn’t make any profit at all. Market structure determines how close to perfect competition you get, but here is an obvious case where perfect competition is in fact a bad outcome – because in the long run you want those companies to have profits in order to have them invest more in their economy, so you can have a greater potential to profit from trading with them. Most trade, after all, is done between rich nations themselves.

Thus the general perception, that the poorer nations have an advantage over the richer nations, because of their low wages, fails to take the downside into account. Worse yet, for a very long time, there has been little in the way of middle ground (which would make the whole arrangement a bit more efficient by functioning as intermediaries).

The point when GDP of the OECD and the rest of the world is about equal (which I expect to happen sometime in the 2020ies) isn’t actually something magical. There won’t be a bright light shining from the heaves and no angels playing music to accompany it – but when developing countries account for just as much economic activity (that can be converted into trading activity) as the OECD this will certainly generate a shift in focus much greater than anything we have seen so far.

Remember, even today the OECD accounts for about two and a half times as much economic activity as all the rest of the world taken together. Any quick fix to our economic malaise will have to come from within the OECD. But within the timeframe it took from the fall of eastern bloc to today, we can expect to live in a world that is profoundly different to the one we’re used to, one in which there will no longer be any reason to look down upon the rest of the world as a “third world” apart from ours with little consequence on our economic well-being – to something that has the potential to solve our economic problems for the next couple of decades by becoming a seemingly insatiable market. (And of course, the source of new problems, especially when the day arrives on which – to universal astonishment – the world markets have been satiated and we there still won’t be any significant exports to our fellow Martians …)

2 thoughts on “The magic moments of the 21st century?

  1. Chinese currency RMB started to get strong since 2003 and revalued in 2005, along with the rise of other Asian currencies. Do you think it can contribute to the decline of OECD’s share of global economy?

    • Well, it will help to shift the economies of those countries towards consumption and away from the focus on exports. This eventually has to happen, because their growing economies already produce so much that they saturate some of the markets they are exporting to – and their own economy is now becoming an ever more attractive place to invest in, now that people have at least some money to spend. But satisfying domestic demand requires a higher share of imports, which can be facilitated if the value of your currency is rising with respect to the countries you are importing from.

      So, it’s not so much an extra contribution, as one of several necessary steps to avoid shooting yourself in the foot through over-reliance on exports – even more so at a time when economic policies of the OECD seem to be hellbent on destroying their own economic base. Look at the often neglected recession in Germany 2009 to see what happens if you rely on exports too much. Don’t worry if you missed it, you’ll see a repetition of it this year and next. (Maybe the media won’t even ignore it this time around.)

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