Wednesday, December 10, 2008

On Goldman's summer forecast

How long ago seems a sunny forecast on rising global wealth delivered this summer by Goldman Sachs chief economist Jim O'Neill:
It is also evident that poverty is dropping dramatically around the world. According to our calculations, the number of people living on incomes of less than $1,000 dollars a year ($2.75 a day) has already dropped significantly from about 50 per cent of the world's population in the 1970s to 17 per cent by 2000. According to our numbers, it could be as low as 6 per cent by 2015. On the more familiar World Bank definition of one dollar a day, the same dramatic shift is evident. Probably no more than 5 per cent of the world's population now suffers this indignity. Of course, this is too much, but as long as the forces of globalisation continue we expect it to drop further.
O'Neill also claimed that 70 million people year are joining the "world middle class" and forecast acceleration to 90 million per year by 2030, "even allowing for a global slowdown."

How does the much more severe-looking worldwide recession affect these projections? On the one hand, on the long view, even a prolonged downturn should not compromise the broad upward trend of human wealth spreading planet-wide -- any more than the rise of radical Islam or of petrodollar-fueled autocracies erases the broad movement toward democracy among the world's nation-states.

On the other hand, the last Depression triggered world war. Prolonged stagnation or contraction could swell the ranks of those receptive to radical ideologies, or destabilize China or India, or help turn any number of countries' frustrations toward outward aggression.

Back in 2001, when India and Pakistan last faced off, Thomas Friedman suggested that India had too much of a stake in its emerging economic strength to throw it away on a potentially nuclear conflict. I thought the logic was dicey then - reminiscent of pre-World War I claims that the economies of Europe were so interdependent that the bankers would always put the brakes on major conflict. But to the extent that growth and hope were restraining factors, those restraints may give way as economic woes mount.

Conversely...a pause in breakneck development in emerging markets may also provide an opportunity for more sustainable growth -- particularly with stimulus packages in the U.S. and perhaps elsewhere pointed toward developing alternative energy sources. And if the slowdown proves to be a "correction" in a non-euphemistic sense, it will lead to increased saving in the U.S. and increased consumption in countries that have been developing rapidly. Can we rebalance without cataclysm?

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