Global Growth Centres 2020

2nd European Futurists Conference Lucerne, November 23, 2006 Global Growth Centres 2020 Challenges and choices for European policymakers Stefan Berg...
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2nd European Futurists Conference Lucerne, November 23, 2006

Global Growth Centres 2020 Challenges and choices for European policymakers

Stefan Bergheim [email protected] www.dbresearch.com

Think Tank of Deutsche Bank Group

DB Research: Deutsche Bank’s Think Tank Analyses the economic, societal, political and technological environment of the DB group… … with a long-term perspective and interdisciplinary scope… … using a broad spectrum of concepts and tools… …and following a foresight approach, knowing that all forecasts are conditional Contributes to the strategy and decision-making of top management Intensively communicates with peers, plays an active role in public debate and strengthens DB’s brand Stefan Bergheim · 23/11/06 · page 2

Global Growth Centres 2020: Agenda 1. DBR’s Foresight Model for Evaluating Long-term Growth – Results: India, Malaysia and China the growth stars of 2006-20 – The four drivers: Population growth, investment, human capital, trade openness – The trends that will shape future growth – Significant heterogeneity in GDP growth across Europe

2. Challenges and choices for European policymakers – Formel-G’s point forecasts need not materialize – Focus on education, labour market, technology, trade etc. – Country-specific strengths and weaknesses

Stefan Bergheim · 23/11/06 · page 3

1.

DBR’s Formel-G

Deutsche Bank Research’s growth ranking Form el-G : Ranking of GDP grow th 2006-20 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Country GDP grow th India 5.5 Malaysia 5.4 China 5.2 Thailand 4.5 Turkey 4.1 Ireland 3.8 Indonesia 3.5 Korea 3.3 Mexico 3.2 Chile 3.1 USA 3.1 A rgentina 3.0 Spain 2.8 Brazil 2.8 Canada 2.4 France 2.3 Norw ay 2.1 New Zealand 2.1 A ustria 2.1 Portugal 2.0 UK 1.9 Sw eden 1.8 Greece 1.7 Denmark 1.7 Italy 1.6 Belgium 1.5 Germany 1.5 Finland 1.3 Netherlands 1.3 A ustralia 1.3 Japan 1.3 Sw itzerland 0.7 Russia No data f or education South A f rica A IDS prevents reliable f orecast

Stefan Bergheim · 23/11/06 · -1 page 4 So urce: Deut sche B ank Research

1

Deutsche Bank Research’s Formel-G “Foresight Model for Evaluating Long-term Growth” Asian economies lead the growth ranking: India, Malaysia and China GDP per capita Population grow th

% per year 3

5

Within the EU-15 range from 1.3% (Netherlands) to 3.8% (Ireland) average annual GDP growth in 2006-20

1.

DBR’s Formel-G

Formel-G: Foresight Model for Evaluating Long-term Growth Ultimate target

GDP

econometric equation GDP drivers

systematic selection by scope, impact, predictability, then clustering

Population growth

trend cluster 1

Investment ratio

Human capital

trend cluster 2

trend cluster …

Openness

systematic selection by theoretical and empirical relevance

trend cluster 6

(total of 21 trends incorporated in Formel-G, aggregated in 6 coherent trend clusters)

generally relevant GDP drivers derived through own data analysis, scientific literature

generally relevant societal, economic and tech trends derived through own screening, cooperation with other experts

Stefan Bergheim · 23/11/06 · page 5

1.

DBR’s Formel-G

Generate GDP forecasts until 2020 with Formel-G First stage: Extrapolation. Past development determines future course of each driver (exception: population growth, which uses UN data) Second stage: Cross-check. Correct extreme developments systematically (only required for investment ratio and human capital) Third stage: Trend analysis. The reliability of the forecasts is increased by modelling structural breaks and assessing a broad range of information (applied to all four drivers)

Calculate GDP forecasts using the econometric equation

Stefan Bergheim · 23/11/06 · page 6

1.

DBR’s Formel-G

Selecting the trends that will shape future growth Basis: 40 DBR trends from the five categories “The individual and society”, “Institutions and political environment”, “Organisational forms and markets”, “Innovation and technology” and “Natural resources” Likely to be significant for future economic growth => 21 trends. But too many possible links to the drivers Therefore we assessed the reciprocal effects among all 21 trends in a cross-impact matrix. The result is 6 consistent clusters

Stefan Bergheim · 23/11/06 · page 7

1.

DBR’s Formel-G

Deutsche Bank Research’s trend map Process virtualisation in networks

Opening of work and society Urbanisation rises

Links between humans and machines strengthen

Labour migration increases

Electronic networks become more pervasive and perform better

Global networking in business and politics

Career paths and work environments become more flexible Women gain more importance in employment

Virtualisation of organisational and market processes

Knowledge-intensive services gain in importance Transnational companies gain increasing importance

Services are increasingly provided across borders Markets are deregulated on national basis

Restriction of growth

Conquest of smallest structures

Potential for social frictions rises Threats from international terrorism increase

Natural resources become scarcer

Global institutions gain more influence

Biotechnology becomes central growth area Micro and nanotech. become important fields of innovation

Enlarging scope of life Regional economic cooperation and integration intensify Health sector grows

DB Research trend map The trends that will shape the global economy in the next two decades

The individual and society Organisational forms and markets

Stefan Bergheim · 23/11/06 · page 8

Populations are ageing

Institutions and political environment Innovation and technology

More trade in intellectual property rights and licences

Natural resources Trend cluster

1.

DBR’s Formel-G

Driver: Level of GDP per capita? Real GDP per capita in PPP

Conventional wisdom: “poor countries grow more strongly than rich ones”

USA Ireland Norway Canada Switzerland Denmark Australia Belgium Japan Netherland Sweden Austria Finland France Germany Italy UK New Zeal. Spain Portugal Greece Korea Argentina Chile Mexico Malaysia Brazil Thailand Turkey China Indonesia India

But no empirical evidence for assumption of absolute convergence. Will not use that idea Growth centres exist among rich and poor countries USA = 100 in 2002

0

Source: OECD und W DI

20

40

Stefan Bergheim · 23/11/06 · page 9

60

80

100

=> There is no automatism! Growth requires “hard” work

1.

DBR’s Formel-G

Population growth shows wide range of changes Population growth 2006-2020

Quantity of labour supply

Malaysia India

More people allow for higher levels of GDP overall

Turkey Ireland

Not really relevant for the individual (GDP per capita)

USA Thailand China Canada

Endogenous growth theories with scale effects refuted in reality

UK France Austria

Baseline forecast (UN) Add-on from trends

Germany Spain

Rapid growth in India and USA (partly immigration)

Sweden Japan Switzerland Italy -0.5

Shrinking population in Italy, Switzerland and Japan

% yoy, p.a. 0.0

0.5

Sources: UN, Deutsche Bank Research

Stefan Bergheim · 23/11/06 · page 10

1.0

1.5

2.0

1.

DBR’s Formel-G

Investment rates to decline from high level in China Investment ratio: Change 2005-20

Accumulation of physical capital boosts productivity of labour

Turkey India USA Japan

But: historical experience shows long-term ceiling of investment ratio around 30% of GDP

Canada Spain Thailand UK

Baseline forecast

Ireland

Add-on from trends

Switzerland Austria Malaysia Sweden

India to see increases from low level; China downward adjustment

Sorted by total change

France Germany China Italy

Spain and UK witness solid upward momentum

% -points -4

-2

0

Source: Deutsche Bank Research Stefan Bergheim · 23/11/06 · page 11

2

4

6

8

10

1.

DBR’s Formel-G

Rising human capital is a key reason for Asia’s growth Quality of labour input: Ability to generate and apply new knowledge

Years of education: Change 2005-20 India China Thailand Italy Spain Turkey Malaysia Ireland France Japan Austria Sweden UK Germany USA Canada Switzerland

Growth of human capital relevant for per-capita GDP growth (not: level of human capital) Baseline forecast Add-on from trends

% 0

10

Source: Deutsche Bank Research Stefan Bergheim · 23/11/06 · page 12

20

30

40

India and China see rapid growth from low levels Baseline shows near stagnation in Germany Our measure: average years of education of the population aged 25 to 64 (OECD)

1.

DBR’s Formel-G

Trade opening is second reason for Asian success Exchanging goods and ideas with other countries promotes learning

Openness: Total change 2005-20 Turkey China India

Increasing competitive pressure boosts efficiency of domestic companies

Spain Thailand Ireland USA Malaysia France

Change in openness leads to change in GDP

Baseline forecast

Canada Austria

Rapid opening in China and India is crucial for their strong GDP growth

Add-on from trends

Germany Switzerland Japan Sweden Italy

in points

UK 0.0

0.2

0.4

Source: Deutsche Bank Research Stefan Bergheim · 23/11/06 · page 13

0.6

0.8

1.0

1.2

1.4

Our measure: Foreign trade in % of GDP corrected for population and price differences

1.

DBR’s Formel-G

Centre of economic gravity moves to Asia Total GDP according to Formel-G in trn PPP USD of 1995

18 16 14

USA

12 China

10 India

8 6 4

Japan

2 Germany 1960

1970

1980

Source: Deutsche Bank Research

Stefan Bergheim · 23/11/06 · page 14

1990

2000

2010

China will close in on US GDP level by 2020 in PPP terms

0 2020

India to become thirdlargest economy around 2010, surpassing Japan Germany and Japan in relative decline

1.

DBR’s Formel-G

Still very low level of per-capita GDP in China and India GDP per capita according to Form el-G in '000 PPP USD of 1995

50

40 USA

Japan 30 Germany

20

China

10

China today = Japan 1960

India 1960

1970

1980

1990

Source: Deutsche Bank Research

Stefan Bergheim · 23/11/06 · page 15

2000

China’s level of GDP per capita is today roughly equal to that of Japan in 1960 – before Japan really started to conquer the global markets

2010

0 2020

DBR’s analysis suggests: - China and India will continue to narrow the gap - They will produce ever more sophisticated products

1.

DBR’s Formel-G

Major differences in income paths across the EU-15 GDP per capita in PPP 120

France

Austria 100

EU-15 = 100 Germany Spain

Korea

80

Portugal 60

Forecast from 2006 40 1975

1980

There is no common EU path. Heterogeneity rules

1985

1990

1995

2000

2005

2010

Sources: Groningen Growth and Development Centre, DBR

Stefan Bergheim · 23/11/06 · page 16

2015

2020

Austria and France keep pulling away from the EU-15 average Spain is rapidly closing the gap to Germany and will soon be ahead Portugal underlines that success is not guaranteed

Global Growth Centres 2020: Agenda 1. DBR’s Foresight Model for Evaluating Long-term Growth – Results: India, Malaysia and China the growth stars of 2006-20 – The four drivers: Population growth, investment, human capital, trade openness – The trends that will shape future growth – Significant heterogeneity in GDP growth across Europe

2. Challenges and choices for European policymakers – Formel-G’s point forecasts need not materialise – Focus on education, labour market, technology, trade etc. – Country-specific strengths and weaknesses

Stefan Bergheim · 23/11/06 · page 17

2.

Challenges and choices for European policymakers

Formel-G’s point forecasts need not materialise Societies have many opportunities to act. Examples: Governments can give priority to education Utilisation of available labour input can be changed Integration of older workers can be increased Women can gain more importance in employment Countries can take advantage of globalisation Output of the innovation system can be boosted Vulnerability to rising energy prices can be reduced

Stefan Bergheim · 23/11/06 · page 18

2.

Challenges and choices for European policymakers

Governments can give priority to education Government spending in Denmark, Sweden and Switzerland focuses on education

Diffe re nt sha res of e duca tion spe nding Public education spending as % of all public spending USA Norw ay Korea Denmark Sw itzerland Ireland

Education ranks low on the list of government priorities in Germany and Italy

Sw eden Canada Finland UK France

2000/02

Spain A ustria Netherlands Japan

Share in education spending has risen strongly in USA, Austria and Ireland since 1990

1990

Italy Germany 0

5

So urce: UN Human Develo p ment Ind icat o rs

Stefan Bergheim · 23/11/06 · page 19

10

15

20

Money is not everything: The structure of education systems matters; plus private initiative

2.

Challenges and choices for European policymakers

Past decisions determine trajectories of skill levels Population that has attained tertiary education in % by age group in 2004, sorted by change old -> young

50

%

55-64

45-54

35-44

25-34

45 40 35 30

In France and Spain new entrants into labour force are much better educated than old workers Stagnation in Germany (and the USA)

25 20 15 10 5 0 Korea France Spain

SE

Source: OEDC Education at a Glance 2006

Stefan Bergheim · 23/11/06 · page 20

Italy

CH

DE

Changes to education policy today will affect the economy with a long lag

2.

Challenges and choices for European policymakers

Utilisation of available labour input can be changed Large differences in hours worked

Hours worked per capita affected by participation rates, unemployment and workweeks

Hours w orked per person of the total population Canada Japan USA Sw itzerland Spain

Level of hours worked much higher in Japan and USA than in Europe

Greece Denmark UK Ireland Sw eden

2004

Finland

1995

Decline of hours in Germany and France continues to date

A ustria Netherlands Italy Germany France 400

500

600

700

800

So urces: Gro ningen Gro wth and D ev elo pm ent C entre, o wn calculatio ns

Stefan Bergheim · 23/11/06 · page 21

900

1000

Strong increase in hours in Netherlands and Spain over past 10 years

2.

Challenges and choices for European policymakers

Integration of older workers can be increased Employment rates of 55-64 year-olds range from 30% (Austria) to 70% (Sweden) in the EU

Different use of older people's potential Employment rate of 55 to 64 year-olds in % Sweden Switzerl. Japan Denmark USA

Sweden, Switzerland, Denmark and UK with high rates

Korea UK Canada Finland

2004

Ireland

1990

Austria, Italy, France and Germany with low rates

Netherl. Spain Germany France

Lisbon target of 50% needs to be raised over time

EU target

Italy Austria 0

20

Source: OECD

Stefan Bergheim · 23/11/06 · page 22

40

60

80

2.

Challenges and choices for European policymakers

Women can gain more importance in employment Nordic countries are leaders in integrating women

More women in parliamentary seats Share of women in parliament in percent Sweden Finland Denmark Netherlands

Japan and Italy are laggards

Spain Austria Germany Switzerland Portugal Canada UK

Rapid progress since 1990 in Austria and Spain

2006 1990

USA

Little progress in Italy (down) and France

Greece France Italy Japan 0 10 20 30 Source: United Nations Millenium Inidcators Stefan Bergheim · 23/11/06 · page 23

40

50

2.

Challenges and choices for European policymakers

Countries can take advantage of globalisation Inward foreign direct investment indicates how much influence foreigners have in the domestic economy

Huge increases in FDI investment Inward foreign direct investment, % of GDP Sweden Switzerland Denmark UK Spain

Small countries tend to have higher FDI levels in % of GDP

France Finland Austria

2005

Germany

1990

China

Large increases in past 15 years in Sweden, Spain and France

Greece USA Italy Korea India Japan 0

10

Source: UNCTAD

Stefan Bergheim · 23/11/06 · page 24

20

30

40

50

Japan and Italy are laggards

2.

Challenges and choices for European policymakers

Output of the innovation system can be boosted Patent activity is very strong in Switzerland, Finland, Japan, Sweden, Germany

Large differences in patenting activity Triadic patent families per million population Switzerland Finland Japan Sweden Germany

Large improvements in the 1990s in Finland, Sweden and Germany

USA Netherlands Denmark France Austria UK Canada

2002 1991

Laggards are Italy and Spain

Italy Korea Spain Greece China 0

50

Source: OECD Compendium of Patents Statistics

Stefan Bergheim · 23/11/06 · page 25

100

150

China is currently imitating, not innovating

2.

Challenges and choices for European policymakers

Vulnerability to rising energy prices can be reduced Energy intensity of GDP has fallen Energy use per PPP GDP (kg of oil equivalent per 2000 PPP $) Canada Finland Korea USA

Energy intensity down: On average, less energy is used today per unit of GDP than in 1991 (Nordic countries obviously at a disadvantage)

Sweden China

Largest improvements in 1990s in China, Canada, USA, Sweden and UK

France Germany Japan

2002 1991

Spain UK Greece

Korea, Spain and Japan went against the general trend

Austria Switzerland Denmark Italy 0.0

0.1

Source: W orld Development Indicators

Stefan Bergheim · 23/11/06 · page 26

0.2

0.3

0.4

Summary: Pressure and scope for action The rise of India and China (and other emerging markets) puts considerable adjustment pressure on EU economies Significant amount of heterogeneity across the EU-15 in terms of outcomes, levels, changes, strengths and weaknesses. Policy recommendations have to be countryspecific There is plenty of room for societies/policymakers to affect their country’s future. Fields of action include: Education, labour markets, openness, innovation etc. Stefan Bergheim · 23/11/06 · page 27

DBR Megatopic “Global growth centres” Introductory study “Global growth centres 2020” Follow-up studies on the drivers of growth “Human capital is the key to growth” and “Opening economies succeed”

Follow-up studies on the trend clusters “Live long and prosper” on cluster “Enlarging scope of life”

Going beyond Formel-G: “Measures of well-being” Country studies with scenario analysis already published: “Turkey 2020”, “India rising”, “Mexico: Tequila sunrise”, “Brazil: O país do futuro?”, “Japan 2020 – decline in trend growth”. Under preparation: Spain, Russia, Germany

Available at www.dbresearch.com Megatopic „Global growth centres“ Stefan Bergheim · 23/11/06 · page 28

Thank you!

© Copyright 2006. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In the United States this information is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Stefan Bergheim · 23/11/06 · page 29