Issue 2003/12

October 2003

Dreaming With BRICs: The Path to 2050

Over the next 50 years, Brazil, Russia, India and China—the BRICs economies—could become
a much larger force in the world economy. The BRICs could become an important source of new
global spending in the near future—and if things go right, their economies together could be
larger than today’s G6 by 2039

Over
BRICs Hav e a Large r US$G DP T han the G 6
the next 50 years, Brazil, Russia, India and GDP
in Le ss T han 40 Ye ars
China—a group we term the BRICs—could (2003 US$bn)

become a much larger force in the world 100,000

By 2040:
BRICs
economy—much larger than they are now and 90,000
G6
BRICS
much larger than many investors currently 80,000 2025: BRICs ove rta ke
e conom ie s the G6
anticipate. We gauge just how large a force the 70,000
ove r ha lf a s
BRICs could become over the next 50 years. We do 60,000 la rge a s the G6
this by setting out clear assumptions about how the 50,000

process of growth and development works and 40,000

30,000
applying a formal framework to generate long-term
forecasts. Using the latest demographic projections 20,000
10,000
and a model of capital accumulation and
0
productivity growth, we map out GDP growth, 2000 2010 2020 2030 2040 2050
income per capita and currency movements in the GS BRICs Model Projections.
BRICs economies until 2050. We also look at our
projections relative to long-term projections for the size of the G6. Currently they are worth less
today’s G6 (US, Japan, Germany, France, Italy and than15%.
the UK).
n In US dollar terms, China could overtake
The results are startling. If things go right, the Germany in the next four years, Japan by 2015
BRICs could become an important source of new and the US by 2039. India’s economy could be
global spending in the not too distant future. Taken larger than all but the US and China in 30 years.
together, the BRICs could be larger than the G6 by Russia would overtake Germany, France, Italy
2039. India’s economy could be larger than Japan’s and the UK by 2050.
by 2032, and China’s larger than the US by 2041
(and larger than everyone else as early as 2016). n Of the current G6, only the US and Japan may be
among the six largest economies in US dollar
Our projections are optimistic, in the sense that they terms in 2050.
assume reasonably successful development. But
Goldman Sachs
they are economically sensible, internally Economic Growth
consistent and provide a clear benchmark against
133 Fleet Street n India has the potential to show the fastest growth
which investors can set their expectations. There is
London EC4A 2BB a good chance that the right conditions in one or over the next 30 and 50 years. Growth could be
England another economy will not fall into place and the higher than 5% over the next 30 years and close
projections will not be realized. If the BRICs to 5% as late as 2050 if development proceeds
Sandra Lawson pursue sound policies, however, the world we successfully.
Senior Global Economist envisage here might in fact come close to reality.
Roopa Purushothaman n Overall, growth for the BRICs is likely to slow
Associate Economist significantly over this time frame. By 2050, only
2050: A Dramatically Different World India on our projections would be recording
Our conclusions fall under five main topics: growth rates significantly above 3%.
http://www.gs.com/
ceoconfidential Economic Size
(44) 20 7774 8736
sandra.lawson@gs.com n In less than 40 years, the BRICs economies Continued on page 2
together could be larger than the G6 in US dollar
terms. By 2025 they could account for over half

Important disclosures appear on the inside back cover of this document.

Dreaming With BRICs: The Path to 2050
Currency Movements
BRICs Exchange Rates Could Appreciate
Continued from page 1 By Close to 300%
n Rising exchange rates could contribute a
Incomes and Demographics significant amount to the rise in US Brazil 129%
dollar GDP in the BRICs. About
n Despite much faster growth, individuals one-third of the increase in US dollar
in the BRICs are still likely to be poorer GDP from the BRICs over the period Russia 208%

on average than individuals in the G6 may come from rising currencies, with
economies by 2050. Russia is the the other two-thirds from faster growth. India 281%
exception, essentially catching up with
the poorer of the G6 in terms of income n The BRICs’ real exchange rates could
per capita by 2050. China’s per capita appreciate by up to 300% over the next China 289%

income could be similar to where the 50 years (an average of 2.5% a year).
developed economies are now (about China’s currency could double in value 0% 50% 100% 150% 200% 250% 300% 350%
Real exchange rate appreciation (%)
US$30,000 per capita). By 2030, in ten years’ time if growth continued GS BRICs Model Projections.

China’s income per capita could be and the exchange rate were allowed to
roughly what Korea’s is today. In the float freely. the next 50 years, India has the potential to
US, income per capita by 2050 could raise its US dollar income per capita in
reach roughly $80,000. Growth Patterns to 2050 2050 to 35 times current levels. Still,
India’s income per capita will be
n Demographics play an important role in Taking each of the economies in brief: significantly lower than any of the other
the way the world will change. Even countries we look at.
within the BRICs, demographic impacts Over the next 50 years, Brazil’s GDP
vary greatly. The decline in working-age growth rate averages 3.6%. Brazil’s Russia’s growth projections are hampered
population is generally projected to take economy overtakes Italy by 2025; France by a shrinking population—an assumption
place later than in the developed by 2031; and the UK and Germany by that may be too negative—but strong
economies, but will be steeper in Russia 2036. convergence rates work to the country’s
and China than India and Brazil. benefit. By 2050, Russia’s GDP per capita
China’s GDP growth rate falls to 5% in is by far the highest in the BRICs and is
Global Demand Patterns 2020 from the 8.1% projected for 2003. By comparable to that of the G6. Russia’s
the mid-2040s, growth slows to around economy overtakes Italy in 2018; France in
n As early as 2009, the annual increase in 3.5%. Even so, high investment rates, a 2024; the UK in 2027 and Germany in
US dollar spending from the BRICs large labor force and steady convergence 2028.
could be greater than that from the G6 mean China becomes the world’s largest
and more than twice as much in dollar economy by 2041.
How the BRICs Will Get Richer
terms as it is now. By 2025 the annual
increase in US dollar spending from the While growth in the G6, Brazil, Russia and As developing economies grow, they have
BRICs could be twice that of the G6, and China is expected to slow significantly the potential to post higher growth rates.
four times higher by 2050. over the next 50 years, India’s growth rate This potential comes from two sources.
remains above 5% throughout the period. The first is that developing economies
India’s GDP outstrips that of Japan by have less capital (per worker) than
2032. With the only population among the developed economies, so returns on capital
BRICs that continues to grow throughout are higher and a given investment rate
results in higher growth in the capital
GDP BRICs Share of GDP Rises GDP stock.
(2003 US$bn) (2003 US$bn) The Largest Economies in 2050
160,000 50000 The second is that developing countries
140,000 G6 share of 45000 may be able to use technologies available
combined BRICs
120,000 and G6 GDP
40000 elsewhere to ‘catch up.’
BRICs share of 35000
100,000 combined BRICs 30000
and G6 GDP
80,000 25000 Continued on page 3

60,000 20000
60%
15000
40,000 56%
50% 10000
20,000 45%
39% 5000
28% 33%
0 0
2000 2010 2020 2030 2040 2050 Ch US In Jpn Br Russ UK Ger Fr It
GS BRICs Model Projections. GS BRICs Model Projections.

CEO Confidential 2 October 2003

Dreaming With BRICs: The Path to 2050
We model each component explicitly. We
Continued from page 3 use the US Census Bureau’s demographic
projections to forecast employment
Countries also grow richer on the back of growth, assuming that the proportion of the
appreciating currencies. Currencies tend to working age population that works stays
rise as higher productivity leads roughly stable. We use assumptions about
economies to converge on Purchasing
Power Parity (PPP) exchange rates. The Annual increase Incremental Demand From
the BRICs Could Eventually
BRICs economies all have exchange rates in US$GDP
(2003 $USbn) Be Quadruple G6 Demand
that are a long way below PPP rates. These 5,000
$4,517
large differences between PPP and actual 4,500 BRICs
exchange rates come about because 4,000 G6
productivity levels are much lower in 3,500
developing economies. There is a clear 3,000
tendency for countries with higher income 2,500
per capita to have exchange rates closer to 2,000 $1,594
PPP. As the BRICs develop and 1,500
productivity rises, their currencies will 1,000
$521 $656
$470
tend to rise towards PPP. 500
0 terms.
To translate these processes into actual 2010
GS BRICs Model Projections.
2030
We then use the projections of productivity
growth from this exercise to map out the
path of the real exchange rate. We assume
that if an economy experiences higher
productivity growth than the US, its
equilibrium exchange rate will tend to
appreciate.
Because both the growth and currency
projections are long-term projections, we
ignore economic cycles. Effectively, the
projections can be seen as growth in the
trend (or potential growth) of the economy
and the currencies’ path as an equilibrium
path. Where economies peg their exchange
rates, it is even more important to view the
$1,137 exchange rate projections as an
equilibrium real rate. We abstract from
inflation, citing our projections in real
2050

projections, we have developed a model

described in detail in the paper released
today. The intuition behind the model is
quite simple. Growth accounting divides
GDP growth into three components:
growth in employment; growth in the
capital stock; and technical progress (or
total-factor productivity growth, TFP).
the investment rate to map out the path that Continued on page 4
the capital stock will take. And we model
TFP growth as a process of catch-up on the
developed economies, by assuming that
the larger the income gap between the
BRICs and the developed economies, the
greater the potential for catch-up and
stronger TFP growth.

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CEO Confidential 3 October 2003

Dreaming With BRICs: The Path to 2050
incorporates both growth and currency
Continued from page 3 effects. On these measures, the BRICs GDPSize andRelative Income Per Capita
2003 US$bn LevelsWill Diverge Over Time 2003 US$
come to dominate the G6 as a source of 50,000 90,000
BRICs and the G6 growth in spending power within 10 years. US$GDP
45,000 80,000
We also make comparisons with the G6, 40,000
US$GDPper capita 70,000
using a less sophisticated version of the Implications of the BRICs 35,000
60,000
model to project G6 growth. We assume a Ascendancy 30,000
50,000
common 2% labour productivity growth 25,000
rate, so differences in projected GDP The key assumption underlying all of our 40,000
20,000
growth are purely a function of projections is that the BRICs maintain 30,000
15,000
demographics (and real exchange rates policies and develop institutions that are 20,000
10,000
remain roughly stable). A shrinking supportive of growth. Each of the BRICs
5,000 10,000
working age population is the biggest issue faces significant challenges in keeping
0 0
in Japan and Italy, where growth rates are development on track. This means that Ch US In Jp Br Russ UK Ger Fr It

lowest, and the smallest issue in the US, there is a good chance that our projections GSBRICs Model Projections.

which maintains the fastest growth. are not met, either through bad policy or
bad luck. n Rising incomes may also see these
economies move through the ‘sweet
We can then compare GDP and GDP per
Despite the challenges, we think the spot’ of growth for different kinds of
capita in the BRICs with that in the G6 in a
prospect is worth taking seriously. After products, as local spending patterns
common currency. The shift in GDP
all, three of the BRICs—China, India and change. This could be an important
relative to the G6 takes place steadily over
Russia—have been at the top of the growth determinant of demand and pricing
the period, but is most dramatic in the first
charts in recent years. patterns for a range of commodities.
30 years. The BRICs overtake the G6
through higher real growth and through the n As today’s advanced economies become
We will use the tools developed here to
appreciation of BRICs’ currencies. About a shrinking part of the world economy,
look in detail at different kinds of scenarios
one-third of the increase in US dollar GDP the accompanying shifts in spending
and to flesh out the links between our
from the BRICs may come from rising could provide significant opportunities
growth projections and investment
currencies, with the other two-thirds from for many of today’s global companies.
opportunities later. For now, we set out
faster growth. Being invested in and involved in the
some brief conclusions:
right markets—particularly the right
We also look explicitly at the source of new
n The relative importance of the BRICs as emerging markets—may become an
demand growth in the world economy.
an engine of new demand growth and increasingly important strategic choice
While it takes some time for the level of
spending power may shift more for many firms.
GDPin the BRICs to approach the G6, their
dramatically and quickly than expected.
share of new demand growth rises much n The list of the world’s ten largest
Higher growth in these economies could
more rapidly. Because it is incremental economies may look quite different in
offset the impact of greying populations
demand that generally drives returns, this 2050. The largest economies in the
and slower growth in today’s advanced
measure may be particularly useful to world (by GDP) may no longer be the
economies.
assess the opportunities in these markets. richest (by income per capita), making
We measure that new demand growth as n Higher growth may lead to higher strategic choices for firms more
the change in US dollar spending power inreturns and increased demand for capital complex.
the various economies, so again it in these markets—and for the means to
finance it. The n Regional neighbours could benefit from
BRICs Real GDP Grow th: 5-Year Period Averages weight of the the growth opportunities from the
% Brazil China India Russia BRICs in BRICs. With Asia potentially
2000-2005 2.7 8.0 5.3 5.9 investment accounting for three of the four largest
2005-2010 4.2 7.2 6.1 4.8 portfolios could economies in 2050, we could see
2010-2015 4.1 5.9 5.9 3.8 rise sharply. important geopolitical shifts towards
Capital flows that region. China’s growth is already
2015-2020 3.8 5.0 5.7 3.4
might move having a significant impact on the
2020-2025 3.7 4.6 5.7 3.4
further in their opportunities for the rest of Asia.
2025-2030 3.8 4.1 5.9 3.5 favour, Sustained strong growth in the other
2030-2035 3.9 3.9 6.1 3.1 prompting major BRICs economies might have similar
2035-2040 3.8 3.9 6.0 2.6 currency impacts on their major trading
2040-2045 3.6 3.5 5.6 2.2 realignments. partners.n
2045-2050 3.4 2.9 5.2 1.9
GS BRICs Model Projections.

CEO Confidential 4 October 2003