Development – Long Term Scenarios for World Economy
The Long View: Scenarios for the World Economy to 2060
OECD Economic Policy Paper No.22
Authors: Yvan Guillemette and David Turner
12 Jul 2018 : 51 pages
[Editor’s text bolding]
This paper presents long-run economic projections for 46 countries, extending the short-run projections of the Spring 2018 OECD Economic Outlook. It first sets out a baseline scenario under the assumption that countries do not carry out institutional and policy reforms. This scenario is then used as a reference point to illustrate the potential impact of structural reforms in alternative scenarios, including better governance and educational attainment in the large emerging-market economies and competition-friendly product market and labour market reforms in OECD economies.
Flexibility-enhancing labour market reforms not only boost living standards but, by raising the employment rate, also help alleviate fiscal pressures associated with population ageing. Another scenario illustrates the potential positive impact of linking the pensionable age to life expectancy on the participation rate of older workers, and in particular that of women.
Additional scenarios illustrate the potential economic gains from raising public investment and spending more on research and development. A final ‘negative’ scenario shows how slipping back on trade liberalisation – returning to 1990 average tariff rates – might depress standards of living everywhere.
Baseline scenario with no institutional or policy changes
:: World trend real GDP growth declines from about 3½ per cent now to 2% in 2060, mainly due to a deceleration of large emerging economies as these continue to account for the bulk of world growth. India and China take up a rising share of world output as the world’s economic centre of gravity shifts toward Asia.
:: Living standards (real GDP per capita) continue to advance in all countries through 2060 and gradually converge toward those of the most advanced countries, but to varying degrees. Living standards in high-growth emerging market and Eastern European economies converge most, driven by catch-up in trend labour efficiency, but GDP per capita in the BRIICS and some low-income OECD countries remains below half that of the United States in 2060. Demographic change weighs on growth in OECD living standards through 2060.
:: Stabilising public debt ratios at current levels while meeting fiscal pressures from higher health spending and demographic change requires the median OECD government to raise primary revenue by 6½ percentage points of GDP by 2060.
:: A global saving glut has been putting downward pressure on real interest rates in recent years, a trend that may persist.
Alternative scenarios with institutional or policy reforms
:: Relative to OECD countries, the BRIICS have substantial room to improve the quality of governance and raise educational attainment. In a scenario where both factors catch up with average OECD levels by 2060, living standards in the BRIICS are 30% to 50% higher in 2060 than in the baseline scenario.
:: Reforms through 2030 to make product market regulation in OECD countries as friendly to competition as in the five leading countries raise living standards by over 8% in aggregate (as much as 15-20% in the countries furthest away from best practices).
:: A reform package to improve labour market policy settings in OECD countries up to those of leading countries raises the aggregate employment rate by 6½ percentage points by 2040, mostly via higher youth and female employment. The package raises living standards by 10% by 2060 and helps alleviate future fiscal pressures related to ageing.
:: Tying future increases in pensionable ages to life expectancy, as some countries have done, raises the aggregate employment rate of older people in the OECD by more than 5 percentage points by 2060 and living standards by about 2½ per cent by 2060 (as much as 5-7% in countries with currently no explicit plans to change pensionable ages).
:: Boosting R&D intensity in all OECD countries to the level of the five leading countries raises aggregate living standards by 6% by 2060 (as much as 10-18% in countries currently spending little on R&D).
:: Permanently raising public investment in all OECD countries to 6% of GDP raises aggregate living standards by over 4% by 2060 (as much as 6-9% in some countries). Fiscal burdens rise by much less than the cost of the additional investment and the policy is even self-financing in some countries.
:: Slipping back on trade liberalisation – returning to 1990 average tariff rates – depresses long-run living standards by 14% for the world as a whole and as much as 15-25% in the most affected countries.