LONDON, 7 March 2006 — Ever since the days of Henry Ford, Detroit has been the hub of the world’s motor industry. Motor City boasted the big three — Ford, General Motors and Chrysler — but it is now a shadow of its former self. Chrysler has been swallowed by Daimler, while between them Ford and General Motors have announced 60,000 job cuts. It could be a sign of a world where the economic geography is changing. One report predicted the new centers of the global motor industry would be in three Asian countries: China, Japan and Thailand.
Since the dawn of the Industrial Revolution 250 years ago, the global economy has been dominated by Western Europe and North America. When Valery Giscard d’Estaing first convened a meeting of the great powers in 1974 to discuss the impact of a five-fold increase in the price of oil, it was dominated by the old order. The G-7, as it eventually became, comprised Britain, Germany, France and Italy — and the two nations of North America. The sole representative from the rest of the world was Japan. Little more than 30 years after Giscard’s get-together at Rambouillet, it is clear that the G-7 is an anachronism. The club has extended membership to Russia, while China, India and Brazil could all stake a reasonable claim to be included at the expense of Italy or Canada.
Over the coming years, this group of emerging economies will grow in number and size, according to a report from PricewaterhouseCoopers. By 2050, the firm estimates the E-7 — China, India, Brazil, Russia, Indonesia, Mexico and Turkey — will have a combined size at least 25 percent bigger than the G-7, and perhaps 75 percent bigger, depending on the measure used to gauge the size of an economy. Measured using market exchange rates, the GDP of China is 18 percent that of the US; by 2050 PwC forecasts it will be 76 percent as big. Using purchasing power parity (PPP) — which takes into account that a dollar in China buys more than a dollar in the US, China’s GDP is already 94 percent as big as that of the US; by 2050 it could be almost half as big again.
China’s aging population means it won’t sustain its high levels of growth for much longer, according to John Hawksworth, PwC’s chief economist. India, with its younger population, will be the fastest growing of the E-7 nations, and will be as big as the US (by PPP) by the middle of the century. Britain will continue its decline down the league table. Having just been overtaken by China as the world’s fourth biggest economy (at market rates), Britain will have slipped below India, Brazil, Indonesia and Mexico to ninth place by 2050. PwC says it would be wrong to take fright at these developments.
That doesn’t mean that the rise of the E-7 will be entirely trouble-free. History suggests that shifts in the balance of power cause geopolitical upheaval — witness the period between 1890 and 1945 — as the new kids on the block flex their muscles and the old guard seeks to maintain the status quo. The US is already wary about the growing economic strength of China. The fear is that China is playing a long game, gradually sapping the strength of the US economy by flooding the market with cheap goods. The scene is set for a period of tension between the current top dog and its East Asian rival.
Even if the differences between the E-7 and the G-7 can be settled amicably, there is one final point — the ability of the world to cope with the phenomenal economic expansion that the PwC forecasts envisage. Previous work in this area by Goldman Sachs (GS) looked at the Bric economies — Brazil, Russia, India and China — and concluded that demand for energy and consumer goods would rocket. Take oil: Between now and 2050, GS estimates demand for oil will double to 169m barrels a day, with both China and India requiring more than the US does now. Where will all this oil come from? The industry remains confident that there are new sources of supply to be tapped, but some analysts say the world may be close to “peak oil”, the moment when supply starts to dwindle. Either way, prices are going to stay high and may go higher.
The oil will be needed, if GS is right, to power all the new cars that will be on the streets of the E-7. By 2050, there will be 555 cars per thousand in the US; in India it will be 382, in China 363 and in Brazil 645. Do the maths. China and India between them have about 2.5 billion people.
If, on a rough estimate, one in every 100 people has a car, that means 25m cars. If the population of the two countries modestly increases by 2050 and that there are 300 cars for every 1,000 — that means getting on for a billion more cars. Throw in the rest of the E-7 and that adds up to a lot of greenhouse gas. Somewhat surprisingly, there is no mention at all in the PwC analysis of whether the world has the carrying capacity to cope with growth of this magnitude. Given our own consumption patterns, it would be two-faced to deny the E-7 what we take for granted ourselves. But far from being reassured that the West has nothing to fear from the rise and rise of the E-7, the opposite is true. We should be terrified, if not for ourselves, then for our children.
