Identifying the Next High-Growth Economies

Abstract

This note is an introduction to using macroeconomics in evaluating the long-term growth prospects of emerging markets. Methodologically, it is an application of growth theory, the Solow model in particular, and it gives students the opportunity to practice reading and interpreting the data of international macroeconomics. The textbook Solow growth model and its basic extensions align well with how investors and policymakers think about forecasting growth and stagnation in emerging markets. However, using public data to measure everything that affects Solow factors is not trivial or necessarily possible, so the note explains the broader, but nonetheless “Solow” approach, of Ruchir Sharma at Morgan Stanley. The note provides data on direct and indirect “canary in the coalmine” growth factors. Classes using the note should center on the question, how do we find the next BRICs? The note is designed as a practical follow-up to growth theory in a first year MBA course, but it would also be appropriate for use in a master's or advanced undergraduate course on growth, emerging markets, or international finance. Excerpt UVA-GEM-0169 Rev. Jan. 24, 2019 ­ Identifying the Next High-Growth Economies In 2001, British economist Jim O'Neill, head of global economic research for Goldman Sachs in London, established the now-famous acronym “BRIC” to refer to the strong growth potential in the economies of Brazil, Russia, India, and China. He wrote, “In all four scenarios, the relative weight of the BRICs rises from 8.0% [of world GDP] at present (in current US dollars) to 14.2%…In each of these scenarios, the increasing weight is led by China, although the other three grow relative to the G7 countries also.” O'Neill was correct. From 2001 to 2014, the annual average PPP-adjusted real GDP growth rates in Brazil, Russia, India, and China were 5.3%, 6.2%, 8.7%, and 8.9%, respectively. Over the same period, the United States, United Kingdom, and Germany grew at average rates of 1.7%, 1.6%, and 2.1%, respectively. . . .