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Pick Your World of 2060, With Trade War or With Innovation

  • OECD illustrates the state of the global economy in 2060
  • Structural reforms, innovation, trade seen impacting growth
Mobius: We Are in Uncharted Waters

The global economy has lost steam, with activity increasingly concentrated in major Asia nations. Aging populations drag on growth and public finances. Living standards have improved -- unless a trade war changes all that.

Welcome to 2060, as seen by the OECD. It’s drawn out how the world will look if policy and institutional settings remain largely the same, and how it might be transformed by investment, innovation, or rising protectionism.

Losing Steam

Trend growth in the global economy will continue to slow, OECD report says

Source: OECD

One of its alternative scenarios is an undoing of trade liberalization -- a growing possibility now that a spat between the U.S. and China continues to escalate.

That would reverse a trend that has ushered in decades of labor-efficiency growth and supply-chain integration across countries. Returning to average tariff rates from 1990 could depress long-run global living standards by at least 14 percent by 2060, the Organization for Economic Cooperation and Development says.

Undoing Globalization

Returning to tariff levels from 1990 would depress GDP per capita by 14%

Source: OECD

Note: Chart shows how much lower real GDP per capita would be if trade tariffs were to return to 1990 level

The report, less concerned with robot servants and flying trains, looks at social and economic structures. The scenarios aren’t meant to be realistic forecasts but should “illustrate some of the forces that could shape the medium and long-term outlook” and inform policy discussion, according to the OECD.

The striking feature in the baseline case is the continued slowdown in world economic growth. From 3.4 percent next year, weakening momentum in large emerging markets and aging populations pull it down to 2 percent over the coming decades.

At the same time, unsurprisingly, the economic center of gravity will shift further toward Asia, with India and China accounting for almost a half of global output.

The alternatives posited include governance and education reforms that boost investment incentives in emerging markets. If the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa) matched OECD nations, they could see their living standards as much as 50 percent above the baseline scenario by 2060.

Institutional Shake-Up

Improved governance and education could boost living standards in BRIICS

Source: OECD

Note: Chart shows how much higher GDP per capita would be if institutional reforms are implemented

The OECD also looks at competition and labor policies, and ways to offset the drag from the demographic shift.

Higher spending on family benefits, lower tax burdens and government programs to help the unemployed find work could boost employment.

Higher Employment

Labor-market reforms could boost number of workers in OECD countries

Source: OECD

Note: Chart shows how much higher OECD employment rates would be by 2040 if various labor market reforms were implemented

Increases in the legal retirement age equal to two-thirds of future increases in life expectancy -- known as the “Portuguese approach” -- in all OECD countries would raise aggregate employment of older people by more than 5 percentage points by 2060.

Other reforms highlighted are boosting research and development in all OECD nations to the level of the five leading countries. That would lift labor efficiency and raise overall living standards by 6 percent by 2060, the report says. Better public infrastructure would also support both private activity and quality of life. Done properly, it can often finance itself as higher output eventually generates fiscal revenue.

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