Working Papers

Renee Fry-McKibbin, Weifeng Larry Liu, and Warwick J. McKibbin

Developing Asia has achieved remarkable economic growth in the last several decades but faces challenges moving from middle-income to high-income status. This paper examines the macroeconomic impacts of future productivity growth in developing Asia on the region and the world, focusing on the responses of private investment. We consider five scenarios of productivity growth driven by catch-up mechanism, with our results showing that Asia’s transition to high-income status requires continued rapid productivity growth and massive private investment. The increase in investment would significantly raise real interest rates
domestically, resulting in international capital flows. Quantitatively, increased investment would be financed mainly through domestic saving, but international capital markets would also play a critical role. Productivity growth in one region generates spillover effects in others through two channels, namely international trade and capital flows. Spillover effects tend to be modestly negative in the medium term because capital flows would increase interest rates, but positive in the long term because regions with rising productivity would increase imports from other regions. Thus, competition among Asian economies and with other developing regions is not a zero-sum game as they benefit from each other in the long term. Continuous improvement in policies, institutions, and governance in developing Asia is required to achieve rapid productivity growth and to reduce the risks among economies in attracting international capital flows. Additionally, we examine two climate change scenarios and show that climate change will negatively impact productive investment and economic growth both in developing Asia and globally, as it will reduce productivity.

Weifeng Larry Liu and Warwick J. McKibbin

This paper surveys long-term projections of global GDP per capita and presents our own projections through 2050 using a multi-country-multi-sector general equilibrium model (G-Cubed). Existing studies generally agree that global GDP per capita growth will continue to slow in the coming decades, driven by several global challenges such as rapid population ageing, slower technological progress, weaker capital investment, and stagnating educational attainment. Projections tend to be consistent for advanced economies, but vary considerably for developing regions, highlighting the importance of alternative methodologies and assumptions, as well as inherent long-term uncertainty. While existing studies rely on neoclassical models with an aggregate production sector, the G-Cubed model takes a disaggregated approach to projecting productivity and output that accounts for dynamic interactions between sectors and across economies. Our projections incorporate the impacts of three fundamental factors: productivity growth, population ageing, and climate change. Productivity growth in advanced economies is expected to slow, but artificial intelligence could counteract the decline and serve as an engine for sustained growth. Population ageing in most advanced economies will continue to constrain labour supply, potentially reducing GDP per capita through changes in age structure. Climate change poses challenges to economic growth through multiple channels, with moderate quantitative impacts by mid-century. The extent to which developing regions can boost productivity, leverage demographic advantages, and navigate climate change will depend on policy choices, as well as governance and institutional improvements. Finally, the paper discusses the implications of geopolitical fragmentation, government debt, and public infrastructure on economic growth.

Lingfeng Lyu, Yang Shen, Michael Sherris, Jonathan Ziveyi