Rise of the TIMBIs

Nov. 30 marked the 10th anniversary of Goldman Sachs economist Jim O’Neill’s anointing of the BRIC economies — Brazil, Russia, India, and China — as the future leaders of the global economy. Yet 10 years on, the notion of the BRICs already seems out of date. In China and Russia, demographic patterns have shifted. Their working-age populations are declining, as are exports, while still-rigid political systems stifle free thought and hamper technical advance.

Future trends still look robust in Brazil and India, but these countries should now be in new company — a group of dynamic and democratic emerging economies. Let’s call them the TIMBIs: Turkey, India, Mexico, Brazil, and Indonesia. These countries form more than just a cute acronym. They all share favorable demographics and democracy and are already large economies. Their GDPs combined have already surpassed that of China and will be much faster growing in the coming decades. Their combination of booming labor forces and political openness points to rapid increases in human capital and innovation that will propel these regional powers into global powers in the near future.

Let’s take a look at the numbers. The chart below shows the trends in the population aged 15 to 59 in the countries or regions that make up the world’s largest economies, using the United Nations’ latest projections of future population growth and examining changes from the base level of 1950 up through 2050.

Figure 1: Growth in the Labor Force (population aged 15-59), Indexed to 1950 level= 100

The chart shows a clear division in trends from 2010 onward, with the TIMBIs enjoying labor-force growth of 10 to 30 percent from now until 2040. Meanwhile, the labor forces of Russia, Europe, Japan, and South Korea will decline by 10 to 30 percent. The United States will continue to grow from 2010 to 2040, but only by about 11 percent.

It is controversial to suggest that China’s enormous growth engine may slow down or stall. Some slowing is inevitable, however. From 1980 to 2010, China’s labor force grew an average of 1.7 percent per year, reaping the gains of Mao’s pro-natalist policies from the 1960s and 1970s. These gains accounted for about one-fifth of China’s annual economic growth in these decades. In the same years, urbanization — a key source of the increase in productivity of China’s labor force, as workers moving from farming to urban manufacturing and services brought huge increases in output per worker — grew at a rate of 4.3 percent per year, as urbanites went from 20 percent to 45 percent of China’s population. Education, yet another key element in increasing productivity, underwent a similarly rapid boom. From 1998 to 2004, total undergraduate enrollment increased from 3.4 million to 13.3 million, an incredible annual increase of 25 percent per year. These trends helped underwrite GDP growth rates of 10 percent per year.

Trends cannot continue at this rate, however, and indeed they have already begun to reverse. In response to the success of the one-child policy adopted in 1978, China’s labor-force growth ceased in 2010, and its working-age population will decline by 15 percent by 2040. This shift from 1.7 percent annual labor-force growth to an annual contraction of 0.5 percent will, by itself, knock 2.2 percentage points off China’s annual economic growth potential over the next three decades. Moreover, urbanization — perhaps the main driver of productivity increases — will decline even more. The U.N. Population Division projects that China’s urbanization will continue, rising from 45 percent of China’s population today to 67 percent by 2040 as an additional 360 million people will be added to China’s cities. As an annual rate of urban growth, though, this is only a 1.5 percent annual increase — a slowdown of about two-thirds from the 1980-2010 rate.

As for educational growth, that too has clearly reached a limit. Twenty percent of China’s college-age youth are in colleges and universities today, a remarkable number for what is still a predominantly agrarian and blue-collar economy. China announced this year that it will limit the growth of doctoral programs. The biggest concern of Chinese college graduates is that their numbers have increased much faster than the economy can employ them, as white-collar jobs are proving extremely hard to find. Thus, all the demographic drivers of China’s recent productivity increase will be lacking in the future.

With demographic trends no longer so favorable to growth, China’s productivity gains will have to come primarily from increasing capital per worker and technological innovation. China’s leaders understand this all too well, but the prognosis is not good. A recent report by IBM on international use of the latest business technologies cited China as 83rd out of 134 countries — India was 43rd and Brazil 58th. Authoritarian countries have never been flourishing centers for innovation; new ideas come from freethinkers who question authorities and existing ways of doing things — hardly a welcome sight in China. The treatment of Nobel Peace Prize laureate Liu Xiaobo, as well as other artists, scientists, and journalists, indicates that freedom of expression is not on the agenda for China’s leaders.

China faces other obstacles as well. Its reliance on exports to richer countries cannot be sustained in the coming decades as the economies of the United States, Europe, and Japan undergo what will likely be sustained slowdowns due to their aging and stagnating populations. Export growth to Europe has already fallen dramatically. Recognizing these changes, China’s central planners are taking steps to shift the economy to a domestic consumption-driven model, but this process is unlikely to sustain double-digit growth because today’s Chinese are — relative to their Western counterparts — much more vigorous savers than consumers. In addition, the raw materials to fuel China’s growth will undoubtedly grow more expensive and increasingly have to be imported.

Compared with much-hyped China, Russia’s problems are well known. Its population is declining, and its health-care system is a disaster — indeed the U.N. demographics division projects Russia’s 15-59 age population to fall by one-fifth in the next three decades. With that projected labor-force decline, for Russia to sustain 5 percent annual economic growth would require that productivity per worker increase by almost 6 percent per year — as opposed to the 2007 level of productivity growth, which was 1 percent.

Russia’s other drivers of growth also show considerable weakness. First, it is not a diversified economy. Although it is a leader in global arms exports and is making progress in software, its other products are not internationally competitive. Fully 25 percent of Russia’s GDP comes from oil and gas revenues. The slowdown in global oil and gas consumption in 2008 and 2009 had a disastrous impact on the Russian economy, and worse consequences were only averted by Russia’s wise provision of a stabilization fund accumulated between 2004 and 2007.

Even Russia’s oil output has been stagnant in recent years. Perhaps most worrisomely, Russia’s dominant position in the European market for natural gas is now projected to have competition from large domestic reserves of shale gas found in Western Europe.

Russia already has a well-educated labor force; improvements in productivity will have to come mainly from new technology and effective capital investments. Both, however, are lacking in Russia today. The IBM report on use of business technologies placed Russia as 59th out of 70 countries in e-business development, and 98th out of 134 countries in the use of the latest technologies by its companies — again, like China, well below India and Brazil. Moreover, the lack of legal protections and a transparent justice system is an impediment to increased productivity down the line. Attracting foreign capital, and the efforts of domestic innovators and entrepreneurs, will require that investors be able to control their corporations and their profits, and operate under a state-enforced rule of law. Russia, however, is drifting toward a condition of endemic corruption and state predation. The recent trial and resentencing of former oligarch Mikhail Khodorkovsky will likely reinforce the belief that Russia is not a nation of laws. This development is fatal for generating innovative entrepreneurship.

Russia’s government and economy will likely be kept afloat as long as oil and gas prices remain high. Yet that merely will turn Russia into Saudi Arabia with snow, not a center for future economic growth.

It might be time to dump the RC from the BRIC. So which countries would we add?

The potential for growth in Turkey, India, Brazil, Indonesia, and Mexico looks far stronger. All these countries are democratic, have developed strong entrepreneurial cultures, will have continued strong growth in their labor forces, and have great potential to increase education levels. Of course, they face obstacles as well. Turkey risks running aground over internal conflicts regarding the rights of its Kurdish minority, which forms about 20 percent of its population, and issues of press freedom. India faces threats of Hindu-Muslim strife, widespread rural uprisings in the northeast, vast inequalities among regions, and entrenched local corruption. Brazil faces daunting inequality, both between its poorer north and more developed south and within its vast cities. Indonesia must resolve long-simmering regional conflicts, and parts of Mexico are close to being overwhelmed by drug violence. Despite these problems, however, these countries have all turned in strong growth performances over the last decade. Additionally, unlike China and Russia, they have demography and freedom — a powerful combination — on their side.

The current obsession with how soon China’s economy will overtake that of the United States is absurd. IMF estimates for 2010 place China’s GDP at about 40 percent of U.S. GDP. If China’s growth rate slows to 5 percent per year from 2010 to 2030, as seems highly likely given the demographic and other obstacles it faces, and the U.S. economy grows at 2.5 percent per year, then in real terms, China’s economy will only grow from slightly more than one-third as large as the U.S. economy today to two-thirds as large in 2030. With its workforce plunging (and aging), there is no reason to expect China’s relative gains to continue after that date. Even if those growth rates continue, though, China’s economy would not catch up with the U.S. economy until after 2050.

The real story of emerging-market growth will occur in the TIMBIs, which will markedly shift their positions in the world economy. The chart below shows the trajectory for the TIMBIs (solid lines) compared with other leading economies (dashed lines). This projection assumes growth rates of 5 percent per year in the TIMBIs and 1.5 percent for Britain, France, Germany, Italy, Russia, and Spain — all countries where the labor force will be rapidly aging and stagnating or shrinking after 2010. (Note that from 1995 to 2005, the annual rate of productivity growth in Western European countries averaged 1.4 percent and that these countries face substantial austerity cuts and demographic reversals in the immediate future. Thus this prediction may even be optimistic.)

Projected Growth Trends, TIMBI and other countries, 2010-2030

(GDP in Billions* of Real 2000 U.S. Dollars)

The big story here is Brazil, which is projected to overtake Germany around 2025, becoming the world’s fourth-largest economy (after the United States, China, and Japan). India will overtake Italy and Britain by 2020 and surpass France and nearly equal Germany in output by 2030, becoming the world’s sixth-largest economy. Mexico will overtake Spain and Russia by 2020 and catch up to Italy by 2030. And Indonesia and Turkey will essentially catch up to Russia and Spain, going from less than half their size in 2010 to near equality in 2030.

And it’s not just demographics. The TIMBIs have diversified economies — their manufacturing, agriculture, and service sectors are all growing. Oil exports, which loom so large for Russia and were once crucial to Mexico and Indonesia, no longer play such a central role. Mexico’s economy grew 5.1 percent per year from 1995 to 2002, even as oil dropped from 62 percent of exports in 1980 to 7 percent of exports in 2000. Indonesia is now a net oil importer due to surging domestic consumption to fuel its own growth.

Turkey is poised to benefit from its position at the fulcrum of Europe, the Middle East, and Africa, resuming its historic central role in Eurasian trade, while also being a huge supplier of goods and services to Central Asia, the Middle East, and Africa. Brazil not only boasts growing technological skills but a huge lead in global energy competitiveness through its early adoption of sugar-cane ethanol for fuel. India’s leap directly to economic growth led by services and white-collar jobs puts it in far better position than China to ward off competition from other low-wage countries moving into manufacturing, such as Vietnam, Bangladesh, and Indonesia.

What’s more, as open democratic societies, the TIMBIs are poised to benefit from making the jump to becoming creative, knowledge-driven economies — a jump that has so far eluded Russia and China despite two decades of trying.

Look also for the TIMBIs to assert themselves in global affairs, not only in the G-20 but in all international forums. If the United States and China will be competing for global influence, with Europe supporting the former and Russia trying to play a balancing role, the critical swing votes in global influence will lie with the TIMBIs. Collectively, they already have a population one-quarter larger than China’s, and a roughly equal GDP; they will also likely grow far faster in the future. Regionally, their global influence spans the Middle East, Latin America, South Asia, and the Pacific. Early engagement will be key to getting the TIMBIs into cooperative partnerships with Western democracies. Already, Brazil and Turkey have been experimenting with an independent foreign policy; should the TIMBIs form a bloc on their own, their impact could readily exceed that of China in scale and global reach.

The economic and political history of the next half-century won’t be the United States and China competing for dominance of the world stage; it will be the quiet but unavoidable rise of the TIMBIs.

*Corrected from original “millions.”