In less than 40 years, China is likely to surpass the U.S. as the world's largest economy and, together with Brazil, Russia, and India -- a.k.a. the BRICs -- will overshadow the economic might of the seven leading industrialized nations of today. So says a Goldman, Sachs & Co. report on these largest emerging economies released on Oct. 1. The provocative conclusions, which initially stemmed from a demographic study, are already attracting wide interest. Goldman's Dominic Wilson, who co-authored the report with fellow economist Roopa Purushothaman, spoke recently about the study with International Finance Editor Chester Dawson.
What must go right to bear out your forecasts for the BRIC economies?
The main requirements are sound macroeconomic policies, reasonably open trade and domestic policies, relatively stable political systems, and political transitions that don't disrupt the growth process. If you compare the growth tracks that we're predicting [for the BRICs] to the growth Asia's "tiger" economies have achieved, we're not asking for them to be miracle economies.
What about supply shocks like the oil crises of the 1970s?
Higher oil prices are probably not critical. Lots of events -- protectionism or misguided policy -- would be worse. If you look at, say, the history of a place like [South] Korea, which was a very rapid development story, it managed to deal with the most severe kind of oil price shock.
How is your study different from other bullish BRIC projections?
Rather than simply extrapolating current growth rates, we have something that captures the whole process of demographic change, capital accumulation, and diminishing returns with development. The other part of it that's distinctive is its explicit modeling of the impact of exchange rates on the spending power of these economies. The balance [of rising gross domestic product] is something like two-thirds from faster growth and one-third from rising currency [values]. So tying that exchange-rate development to that growth story helps give a more integrated picture.
Will the Group of Seven industrialized nations be sidelined?
In some ways, their relevance is already coming under question. We just had a G-7 meeting in Dubai a few weeks ago in which one of the major topics was the flexibility of Asian exchange rates, and in particular whether the Chinese yuan should be either revalued or made more flexible. Yet China was not at the table to discuss [it], and that raises some issues about how useful a forum that is.
So is the U.S. in economic decline?
Although the relative importance of the U.S. declines quite considerably, it's still one of the two largest economies [with China] at the end of the period and still the richest economy. So it's not a story of dramatic decline of the U.S. Because of its favorable demographics [such as a stable birth rate], it ends up looking a lot better than the other developed economies. And on an income per capita basis, really only Russia will move into the income levels of the developed countries. So you'll have a situation where the largest economies of the world are no longer necessarily the richest countries.
Although India's growth rate is expected to beat China's, why won't its economy overtake the U.S.?
India certainly approaches the kind of levels of spending that you'll see in the U.S. and China, but it doesn't overtake them. If we ran the process out another couple of decades, the projections would imply that it would. India has the highest growth rate across this period and one that declines much less sharply than the others. But their starting point is really so far behind even a country like China that the time horizon we're talking about -- four or five decades -- just isn't long enough.
What are the implications for investors from the rise of the BRICs?
The area that people get most excited about is the stage of very rapid penetration in consumer products. We've found the sweet spot is around $3,000 to $10,000 per-capita income levels. Probably the first economy to hit those levels -- and fairly soon -- is Russia. China will take a little bit longer, with the sweetest period beginning probably in about a decade.