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Pick your world of 2060, with trade war or with innovation

Undoing of trade liberalisation is a growing possibility now that a spat between the US and China continues to escalate.

The global economy has lost steam, with activity increasingly concentrated in major Asia nations. Ageing 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.

One of its alternative scenarios is an undoing of trade liberalisation — a growing possibility now that a spat between the US and China continues to escalate.

That would reverse a trend that has ushered in decades of labour-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% by 2060, the Organisation for Economic Cooperation and Development says.

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.

Source: Bloomberg

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

At the same time, unsurprisingly, the economic centre 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% above the baseline scenario by 2060.

The OECD also looks at competition and labour 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.

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.

Source: Bloomberg

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% 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.

© 2018 Bloomberg


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