2020 World Ekonomy

Executive Summary
Understanding the 2020 world requires not only the study of the effect of the global financial crisis but also the paths to recovery traced by the world economies. To predict the Delphic future one needs the understanding of the political-economies around the world .At the same time demographic and geo-political factors will also have a significant bearing on the state of 2020 World. Emergence of various modes of capitalism in developed world economies,will mark a shift from entirely market-driven economy ,due to current realities of huge fiscal deficits and future social safety liability (due to an ageing population) .The emerging economies on other hand will practice market rules to a point but with significant deviations ,marked by embedded socio-political ideals , difficult to forecast.
This paper explores the 2020 World Economics on the basis of above factors. First, we divide the world in 7 major economic regions – North America , Latin America , Western Europe , Middle East ,East Europe & Russia, Africa , Asia , Australia and Oceana. Then we choose the potential ‘stars of the next decade ‘ from these economies and then examines them individually on three broad points : effect of 2008 crisis , the response by the economies to crisis , post-crisis economic policies. The study also incorporates a scenario analysis of the world under optimistic and pessimistic expectations.








.




1.0 Introduction
Governments from world over responded to the 2008 economic crisis with typical principles of depression economics (the Keynesian economics and QE) .The most vital point that appeared was , as economist Irwin Stelzer argues for the US-economy, “we have gone from a market-driven economy to a politically driven economy”. This statement holds a key into the future. The modes of capitalism that evolve will have a significant bearing on world economic order in 2020.This discussion is relevant because globalized world (resulting in significant capital & trade–exposures) has evidently made the decoupling hypothesis irrelevant. The crisis made it evidently clear that business cycles of developing world in now synchronized with the developed world. A post-crisis world is thus dependent on the political ideals embedded in the economic policies .How will the world transform post-recession? Three very evident transformations will be :
 Advanced economies will slow down :
Since 1990’s the advanced economies have clocked slower growth rates due to rapid growth of developing economies. Post recession this trend will be accelerated due to ageing population , large fiscal deficits , and changing geo-political order.
 Emerging Economies charging for take-over ! Emerging economies are catching up with the advanced world. By 2020, there will be changes in the global balance of economic power. With five emerging countries in the list of top ten largest economies, global power will become more balanced by 2020


 Shift of Economic Power: How real? And at what costs ?
While with a huge population and rising household incomes, the consumer goods and service markets in emerging economies will provide enormous opportunities for businesses. Their young & skilled workforces will drive the MNE’s. The rise in economic importance of emerging countries will lead to a rise in their global political influence , thus ensuring a more balanced ( and probably more stable)geo-political environment . Emerging countries will also become more important foreign investors, thus enhancing their influence in the global economy. Since the early 2000s, China and India have become major foreign investors in Africa & Latin America.


All this will however come at cost of “global warming” due to increasing energy needs . Foreign investment will continue flowing into emerging countries, yet foreign investors will still face heavy regulations and corruption. Overheating economies, commodity needs and rising wages will continue to put an upward pressure on long-term inflation. The rapid growth of emerging economies may also lead to rising social unrest due to the unequal distribution of wealth.
Let us now explore the 7 economic regions & find “stars of the next decade”
2.0 Rise of Asia
The likely emergence of China and India is similar to the advent of a united Germany in the 19th century and a powerful United States in the early 20th century—will transform the geopolitical landscape, with impacts potentially as dramatic as those in the previous two centuries. A combination of sustained high economic growth, expanding military capabilities, and large populations will be at the root of the expected rapid rise in economic and political power for both countries. Barring an abrupt reversal of the process of globalization or any major
upheavals in these countries, the rise of these new powers is a virtual certainty

2.1 The Dragon
2.1.1 The Effect of Crisis : Chinese economy has been mostly led by investment driven and export led growth which is unsustainable. The growth in Chinese exports can’t be persistently higher than world economy. Overcapacity surfaced leading to correction. The global financial crisis exposed this vulnerability of Chinese economy to a large extent.
2.1.2. Response to Crisis : China responded by using an expansionary monetary and fiscal policy. They could afford to do without much trouble. China also went on a massive investment overdrive in strategic location (Africa, Latin America) for its energy needs. They also became largest foreign owner of American government debt. By 2010 , China has started gradual withdrawal of monetary stimulus.
2.1.3 Financial crisis made China a economic superpower
The financial crisis has further enhanced China’s importance in the world economy. It is said to have about $2 trillion in foreign currency reserves.They also enjoyed a enjoyed a trade surplus of $266.3 billion in 2008.The reserves allow them to peg currency, which some doubt may lead to “ Currency Wars”. However, ten years will be too short a time to establish Yuan as world reserve currency because a much longer period will be required to liberalize the Chinese economy, build up efficient money and capital markets, and foster the deep and liquid markets consistent with reserve currency status.
2.1.4. Capitalism – in the communist style: The growth first ideology is consistent with the Communist party of holding its power in China. The state-sponsored growth will help keep the simmering desire for civil-liberty at bay for short run. But, in the long run , to sustain development -government will need to unlock potential by liberating and upholding property rights through legal frameworks and institutions , which in-turn would undermine the political supremacy of communist party. It will be interesting to see how this experiment of capitalism (modes of capitalism) will survive beyond the current decade.

2.2 The Elephant
2.2.1 The Effect of Crisis :
The contagion of the crisis spread to India through three major channels – the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel. Global liquidity squeeze affected Financial markets in short term , and also slowed credit growth due to confidence channel from 22.3% (07-08) to 17.3%(08-09) .GDP sunk to lows of 6.7% (08-09) from highs of 9% or more in previous three years.
2.2.2 Response to Crisis
This was a downturn and not a recession and was well countered by fiscal and monetary stimulus.However India’s response was adequate and not a largesse like that of China –“biggest stimulus in global history” .
2.2.3 Resurgent India : Post Crisis
India maintained robust growth without Beijing's hefty stimulus in part because it is less exposed to the international economy. more protection from the worst effects of the financial crisis in the West, while China's government needed to be much more active to replace lost exports to the U.S. More significantly, though, India's domestic economy provides greater cushion from external shocks than China's. Private domestic consumption accounts for 57% of GDP in India compared with only 35% in China..
India is banking on following four factors to fuel growth in the next decade
(i) Infrastructure Spending by Government in next decade.
(ii) Service-orientation will accompany growth of real sectors
(iii) Income Distribution (fall in deprived group and rising income of middle class)
(iv) Demography (increasing working age population)
All these have a significant trickle down effect in making India a economic superpower in 2020 ( $5tr Economy by 2020 according to D&B)
2.2.4 Regulated Capitalism-!
Following four decades of Fabian socialism ideals, India opened its economy in 1991- but this was a special case of regulated capitalism . To achieve full potential though India needs to fight the potential threats of inequality and poor governance apart from liberalizing financial markets, improving infrastructure and agriculture productivity. Democracy and Demography will remain vital forces in India trumping China post 2020.
2.3 Japan 2020 : Land of rising sun and declining growth.
After the lost-decade , Japan faced another crisis ’08 .For Japan this was clearly the worst post-1945 recession, by far, with a 6% drop in real GDP output between September 2008 and March 2009.While the government has promised 2% growth per year for next decade , surprisingly Japan has clocked over 2% only 5 times since 1992. To add to the woes are the deficits (8.6% of GDP) and public debt (200% of GDP) With ageing population it would be difficult to finance such a debt internally or via savings of its citizens. Population is shrinking at a faster rate too and the society inherently opposes stronger immigration.
3.0 Threat to US hegemony !
American-style liberal capitalism has been challenged & is pitted against "state capitalism".
Recession : A scar that will linger long !
U.S. economy is recovering after the global economic crisis, but consumers and financial institutions remain cautious as weak housing markets, high unemployment, and risks in Europe remain a concern. Massive bailouts and expansionary monetary policies have helped avoid the worst of recession but now USA is in precarious shape.
(i) Deficit (12.3 % of GDP in 2009 largest since WWII), Total Public Debt Outstanding (95% of GDP ,Nov 2010 )& Un-employment (9.6% ,Oct 2010)
(ii)Ageing Population & Rising Social Security (spending is projected to rise from 4.8% of GDP in 2010 to 5.9% of GDP by 2030, where it will stabilize)
(iii)Long term inflationary pressures. By 2020 the US economy will see real inflation. This is a one way for the Federal Government to begin to reduce its trillions of dollars of debt. Rising Wages (due to lack of skilled workforce in an ageing demography) will push inflation upwards
The aftershocks from deep recessions will haunt for years, even decades, and take an enduring toll on everything from government finances to countless upended individual lives.

The future While USA is still expected to be top economy in 2020 , its economic hegemony will be challenged. Let us trace this changing economic balance on basis of following factor Economic power, Currency power &Financial Power.

4.0 Hit by a Double Whammy !-Western Europe
Western Europe was hit by a double whammy .While the recovery was still fragile post 2008-recession the region had to counter the sovereign debt crisis of 2010.
Sovereign debt crisis –Impacts
(i) Has put the EU ( And EMU) under its biggest test to prove economic strength
(ii) Spillover effects delaying the recovery
4.1 Germany
After Crisis : The crisis hit Germany hard tanking its economy by 6.7% for four quarters following Q12008.Despite this, German economy has made an solid recovery(clocked fastest growth rate since reunification), especially in exports through stronger partners such as China ..
Challenges Ahead :
(i)Tackling the sovereign debt crisis
(ii)Role in creating EU-stability
Positives for 2020
(i) Success with exports of high-tech, patents, licenses, computer games, knowledge intensive services
(ii) Massive foreign investments from China , India , Middle east and PE’s from US
(iii) Foothold in renewable energy technology.( But,need political will)
(iv) Centrist political position – can benefit from rise of China & India .
4.2 United Kingdom - Rebalancing the economy
Challenges Ahead :
(i) Balancing trade deficits .Aiming for fiscal consolidation(Deficits 11.2 % of GDP , 2009 ) and servicing huge national debts (57.1 per cent of GDP ,Oct,2010)
(ii) Manufacturing declined under competitive pressure from developing economies.
(iii) The UK’s energy sector faces significant challenges over the next 10–15 years, both to maintain secure energy supplies and meet climate change and renewable targets

Challenged but all is not lost !
(i) UK’s dynamic and flexible labour market remains key strength. Transition is needed towards high growth and knowledge based sectors.
(ii) Technology and Innovation holds key

5.0 Oil Economics (Russia & Middle East)
These are mostly oil-economies and are prone to the famous “Dutch disease” .The pre-crisis period reminded the why the threat was so real. Oil prices had shot to all time highs of $147 per barrel just before recession and then they tanked.
Major middle eastern region that will benefit post crisis are UAE-Abu-Dhabi ( can survive with low $/br. And thus can build reserves for strategic investment) and Iraq ( post war it can become major oil supplier). East Europe ( Ukraine, Romania) is an up and coming center of high–tech, low cost manufacturing with a well–educated workforce. Business is being transferred from the west – from North America and Western Europe – to the east Europe for low cost , low volumes and high skilled.

5.1 Russia
The Crisis : After being hit hard by the global financial crisis, Russian economy finds itself in a difficult situation. Capital flight began in second half of 2008, when USD 150 billion had fled the country.It needs to find ways to return to sustainable economic growth, beyond just plain post-crisis recovery. They need to chalk out a plan different from the rent seeking , crony capitalist model of Putin era.
The response : The massive outflow of liquidity had forced the Government to use its accumulated reserves to substitute it. Central Bank had lost about $200 billion of its hard currency reserves trying to slow down the sharp depreciation of rouble. The fiscal deficits reached 5.9% (2009).
The Future : With declining reserves (foreign investors faith in Russian debt decreased).There’s always a possibility that oil prices may rise above $100/bbl and further upwards again but not before 2014-2016.Hence to survive as the global power of future Russia needs to shun away from rent seeking model,increase efficiency of the economy & increase productivity

6.0 Africa
The spread of the global financial crisis led to a slowdown of private capital inflows, thus putting at risk the beneficial growth effects of the recent surge in FDI and cross-border bank lending. The main challenge facing these countries now is how to position themselves for post-crisis recovery as well as ensure that policy responses to the crisis do not lead to medium- and long-term problems of debt sustainability. Africa needs to spur the democracy movement , restoring market economies and shared interest to cash on its natural resources and demographic potentials in the next century
7.0 Lights and Shadows : Latin America
As viewed from the early 21st century, the prospects for Latin America in 2020 will be a mixture of lights and shadows. In recent years, Latin America has improved in terms of democratization, some institutional development and a broad consensus on the virtues of financial stability. But the region has also experienced poor social results, inconsistent economic growth, deep loss of legitimacy of its political players. All these challenges will need to be addressed for both Brazil and Mexico in course of next decade.
However, even modes of capitalism in Latin America have followed different trajectories ( and their response to crisis , post-crisis position –all have relevance to the mode of capitalism followed) . While Brazil excelled with state led capitalism intervention for internal market , Chile’s model of export led capitalism with strong intervention of the State failed.Mexico did relatively well with its export led capitalism based on little state intervention.

7.1 Mexico – rise of Golden Eagle

The Crisis During the last two years, Mexico experienced a harsh economic downturn. From Q2’08 - Q2’09 per-capita GDP plummeted by approximately 10% (Mexican’s were reminded of post-war periods). Mexico was affected by the global crisis through the financial sector in the form of substantial market volatility and a generalized fall in asset prices. Mexican economy was most deeply disturbed through the real sector, as seen in the contraction of international flows of goods and services, especially to and from the United States, Mexico’s main trading partner.
Sound Crisis Management The present day Mexico ( compared to post-war Mexico) has better macroeconomic fundamentals, including a solvent fiscal position, a floating exchange rate system, and an independent central bank committed to price stability , all these elements enabled Mexico to tide away the external shocks external shock on domestic spending.
The Destiny Mexico is set to Overtake Italy as 10th Largest Economy-PPP terms in the World by 2020 ,clocking 3% GDP growth .Enjoys cheap abundant labour and industrialized economy with USA as a neighborhood consumer.
7.2 Brazil –
Braved the Crisis The effects of the 2008-2009 global crisis were less drastic than expected at the outset, which signifies to us that Brazil’s growth pattern is less susceptible to changes in course as a result of the external outlook. However, this does not mean that the Brazilian economy is immune to the global crisis. On the contrary, the crisis has caused Brazil’s GDP to backtrack from an average expansion of 1.6% from Q1-2008 to Q32008 to fall of 4.4% in Q42008 to Q12009. But the return to economic expansion has already taken hold in 2Q2009, demonstrating that Brazil’s solid fundamentals have enabled rapid adjustment to the change in global outlook.
The Reponse to Crisis : Brazil is a state led capitalism oriented towards the internal market. During Crisis, Brazil continued doing more of what it had been doing up to then: strong State investment and the building up of the internal market.
The benefits from the Crisis ! This greater resilience to the external crisis has favorable consequences for the middle- and long-term outlook for the Brazilian economy. Uncertainty regarding the resilience of the country’s economic fundamentals dissipated fairly significantly as the crisis unraveled. Overall country risk and real interest rates should decline even further in the next few years, leading to higher investments and, therefore, higher potential output growth. Thus, the path of Brazil economic fundamentals suggests that, after several decades, potential GDP growth should be higher & less volatile than in the past.
This apart from other advantages of stable banking institutions , large infrastructure investment needs & immense potential in electricity.
8.0 Resilient Australia
Resilience to Turmoil The economy was indeed hit by the global crisis. But growth was stronger than in any other advanced economy. This resilience is the result of robust demand for commodities, a flexible exchange rate, and a healthy banking sector. Cuts in interest rates and a sizable fiscal stimulus were also key factors.
Australia entered the global turmoil on solid footing, and thus the exit strategy appears less challenging than other developed countries. Indeed the early recovery, compared to other advanced countries, has allowed the Reserve Bank of Australia to begin normalizing interest rates.
Steady Sail The Australian economy is expected to grow by 2½ percent in 2010 and 3 percent in 2011, according to IMF. Growth will be led by domestic demand, both private and public, where we have seen better-than-expected domestic performance in recent months, especially in the labor market.
New Realities Strong commodity income prospects are supporting investment. In coming years, Australia is likely to continue to benefit from China’s demand for commodities
9.0 Scenario Analysis: World Economics 2020
Three most important factors that will shape the economics of 2020 are

1.Different Modes of Capitalism
The most significant impact of these Asian Economies will be the different modes of capitalism practiced. While China will become increasingly capitalistic , with only formal rules of ownership . On the other hand we will have India whose legal property rights will be qualified by regulations that will limit capital flows.How their politics , cultures and economies evolve will have a significant bearing on economic future of the world in 2020 and beyond.
2. Shocks !
2.a Energy Shocks The burgeoning economies of the next decade will rely heavily on conventional energy , which will be contingent on highly precarious geo-political environment of middle east. And given that transition on renewable energy sources will take decades the stability of industrial economies and that of global economy will always remain at risk in short run .
2.b Terrorism While terrorism will remain a potential threat .In worst case terrorists may acquire WMD’s. Impact of religiosity on unity of states and potential for conflict; growth of jihadist ideology are other potential threats.

2.c Sovereign Risks The global financial system and the world economy are slowly regaining their health, thanks in large part to unprecedented interventions by governments, but the sharp rise in government debt during the economic crisis is the newest threat to the financial system: growing sovereign risk. ( Ref :Bailout of Greece and Ireland)
3 Income Inequalities Rising income inequalities in the emerging economies like Russia , India and China , will always be a threat to government stability , the quintessential for market stability profitability ( higher cost of capital) .This would however effect in long run, the policy needs are fostering political liberty and inclusive growth.

10.0 Conclusions
The changing economies realties must be accepted by all players . While globalization-linkages propagated the recession , same linkages have helped in spurring the recovery. It is time when the developed world led by America don’t fall into negative psychology of protectionism leading to economic retaliation ,while at the same time pressing for a economic balance between trade deficit countries and trade surplus countries. At the same time ,countries like China realise the unsustainability of huge trade surpluses by spurring domestic demand and adopting flexible exchange rate.






References
[1] “The Age Of Turbulence- Adventures In A New World” by Alan Greenspan , Penguin Publication , 2007
[2] “Return of Depression Economics” by Paul Krugman , W.W. Norton & Company ,2009
[3] Datagraphic “Countries and Consumers , Biggest Economies and Consumer. 2010 v.s 2020 “ , a report by Euromonitor International ,2010
[4] Economic Balance of Powers after the Crisis:by JUNG Ku Hyun , Septemeber 15, 2009 ,Samsung Economic Research Institute .
[5] The 36th Middle-Term Economic Forecast (2009—2020)-Japan Centre for economic research ,Feb , 2010
[6] “India-China 2020: Great Leap Forward?” A Discussion Paper by Dr. Charan Wadhva & Zhang Jun, on 23rd March 2005 at The Foreign Press Association,London
[7]Economic Crisis in Europe: Causes, Consequences and Responses- A report published by European Comission , European Economy 7|2009.

[8]Russia2020www.cgascenarios.wordpress.com ( Spring 2010 , Number 4)- accessed 18th Novemeber 2010
[9] Post Financial Crisis - New Global Paradigm and Asia's Role- speech by Dr. Tony Keng ,Deputy Chairman and Executive Director ,Govt of Singapore Investment Corp At The Commenwealth Economic Forum , Taipei , Taiwan, 18th Jan 2010

[10] A common economic crisis but contradictory responses: The European experience 2008-09, Working Paper No. 93, Robert Kyloh And Catherine Saget, Policy Integration Department International Labour Office, Geneva, May 2009
[11] The Budget and Economic Outlook:
Fiscal Years 2010 to 2020: Congressof The United States , Congressional Budget Office
[12] Latin America 2020: Discussing Long-Term Scenarios : Summary of conclusions of the workshop on Latin American Trends Santiago de Chile, 7-8 June 2004 for the National Intelligence Council Global Trends 2020 Project