Cambridge, Massachusetts – India has the potential to be the fastest growing economy over the coming decade, according to new growth projections presented by researchers at the Center for International Development at Harvard University (CID). The researchers use their newly updated measure of economic complexity, which captures the diversity and sophistication of productive capabilities embedded in a country’s exports, to generate the growth projections. The projections reflect the latest 2014 trade data available. The global landscape for economic growth that results shows greatest potential for rapid growth in South Asia and East Africa. Conversely, oil economies and other commodity-driven economies face the slowest growth outlook.
India tops the global list for predicted annual growth rate for the coming decade, at 7.0 percent. This far outpaces projections for its northern neighbor and economic rival, China, which the researchers expect to face a continued slowdown to 4.3 percent growth annually to 2024.
“India has made important gains in productive capabilities, allowing it to diversify its exports into more complex products, including pharmaceuticals, vehicles, even electronics,” said Ricardo Hausmann, Professor of the Practice of Economic Development at Harvard Kennedy School (HKS), the leading researcher of The Atlas of Economic Complexity, and the director of CID.
Hausmann notes these gains in economic complexity have historically translated into higher incomes. “China has already realized many of these gains, doubling per capita income in less than a decade. We expect that India’s recent gains in complexity, coupled with its ability to continue improving it will drive higher incomes, positioning India to lead global economic growth over the coming decade,” Hausmann said.
Growth in emerging markets is predicted to continue to outpace that of advanced economies, though the gap is closing. The CID projections are also bullish on East Africa. Five East African countries, which include Uganda, Tanzania, and Kenya, rank in the top ten, with all predicted to grow at least 5.5 percent annually. The growth forecast also looks favorably on Southeast Asia, where the Philippines, Malaysia, Indonesia, and Vietnam look to drive growth well above global averages. Growth in advanced economies remains slow by comparison, though it has risen slightly in the projections in recent years. The U.S. is expected to grow at 2.8 percent annually to 2024, with higher growth predicted in the United Kingdom and Spain, and slower growth in Italy and Germany.
The projections are based on a decade of research into the relationship between measures of economic complexity and growth, which, the researchers argue, isolates a consistent fact: countries that diversify their productive knowhow beyond what is expected by their income tend to grow faster. Economic complexity shows remarkable accuracy in explaining differences in countries’ income levels—and in predicting future economic growth, with much greater accuracy than the World Economic Forum’s Global Competitiveness Index.
“Sustained economic growth is fundamentally human-driven: the greater the diversity of productive knowhow in a place, the more the complex products it can make, which underpins income gains,” said Timothy Cheston, a CID researcher on the project.
New Economic Complexity Index
Along with the growth projections, CID released new country rankings in the 2014 Economic Complexity Index (ECI). The ECI ranks countries based on the complexity of their export basket, which was updated to include the 2014 data while also incorporating revisions to previous years stretching back to 1962. The ECI is a measure unique to CID, as pioneered by researchers Sebastian Bustos and Muhammed Yildirim with Hausmann, who together updated the new data. The top of the rankings continue to find Japan, Germany, and Switzerland holding the greatest economic complexity, while Great Britain (10th), the United States, (13th) and France (16th) have all slid. The countries that have slipped fastest in the rankings, with worsening complexity, are concentrated among oil economies, most notably Venezuela and Azerbaijan. The top gainers concentrate in Southeast Asia and Sub-Saharan Africa. Notably, many of the countries that have made the greatest improvements in their complexity have achieved the fastest growth in per capita income over the past decade, including China (ECI rank: up 16 positions to rank 17th globally) and South Korea (up 11 positions to rank 4th).
CID researchers noted numerous cases where previous iterations of the predictions have played out in reality. Greece has long factored as an outlier for having a higher income level than expected for its level of complexity, predicting a dip in growth. Even after a decade that averaged negative growth, the new projections show continued low growth prospects for Greece.
The economic complexity approach provides a series of challenging questions for policymakers looking to diversify their production to strengthen growth. CID research into how complex firms start in a location finds that new know-how often arrives from outside the community.
“Immigration policy must confront the fact that many of the firms that help diversify a country and drive its growth are started by immigrants and foreign firms,” Hausmann said.
In education policy, the economic complexity approach points to a need to move beyond goals for universal general education to focus on expanding the diversity of specialized productive know-how.
About the Center for International Development
The Center for International Development (CID) at Harvard University is a university-wide center that works to advance the understanding of development challenges and offer viable solutions to problems of global poverty. CID is Harvard’s leading research hub focusing on resolving the dilemmas of public policy associated with generating stable, shared, and sustainable prosperity in developing countries. Our ongoing mission is to apply knowledge to and revolutionize the world of development practice.
Contact: Chuck McKenney
Phone: (617) 495-8496
Date: Dec 21, 2015