Wednesday, 23 March 2016

The Fifth Largest Economy?

Brexiteers repeatedly argue that a Britain outside the EU would prosper because Britain, after all, is the world's fifth largest economy. But, in fact, not only is this argument spurious, but it also shows what is wrong with their underlying world view. We will set aside the fact that a hundred years ago, Britain was the world's largest economy, and still ruled the world, and the fact that even sixty years ago, it was still the world's second largest economy behind the US, which had taken over its first place spot. We can set aside the fact that not too many years ago Britain was still the third or fourth largest economy. In other words, we can set aide the fact that Britain's standing in the world rankings has been rapidly declining over the last one hundred years, and was one reason it needed to become part of a larger economic bloc in the first place.

Instead, let's look beneath the fact of this fifth place, and examine what it means in reality. As the saying goes, “In the world of the blind, the one eyed man is king.” In other words, what exactly does being fifth largest economy mean in a global economy that comprises more than 200 different countries. We might have, for example, a distribution that was something like A $ 2 trillion, B $1.5 trillion, C $1 trillion, D $0.99 trillion, E $400 billion, F $300, G-Z $ 50 billion.

In that case, economy E, is the fifth largest economy, but it is only a fifth the size of the largest economy, and half the size of the fourth largest economy. Its actual standing appears quite different when viewed in this way, and when the vast number of economies are seen as being more or less in a different league. A football team might be 20th, out of a league of 100 clubs, but its 20th position doesn't change the fact that it is at the bottom of its division, and about to get relegated!

The world's largest economy, the United States has a GDP of $18 trillion. China, which is the second largest economy, has a GDP of $11.4 trillion. Third place is held by Japan, with a GDP of $4.1 trillion. In fourth place is Germany with a GDP of $3.4 trillion. Britain's GDP is $2.9 trillion, whilst France is close behind with $2.4 trillion. (All figures for 2015, based on the CIA World Factbook).

In other words the UK may be the fifth largest economy, but it is only a seventh (14%), of the size of the US economy. It is only a fifth the size of the Chinese economy, and getting smaller in proportion by the minute. It is only three-quarters the size of the Japanese economy, which has itself been going backwards for the last 25 years. What is more, behind France comes a list of economies, which are moving in the opposite direction to the UK. Where the UK has been in decline for more than a hundred years, when its top spot began to be challenged by Germany, the US, France, Japan and so on, economies like Brazil, India and so on, which occupy the positions below France, have been growing, and moving up the rankings quickly. Britain, may be the fifth largest economy today, but on the basis of its relative decline over the last century and the relative rise of these other economies, it will only be a matter of at most a decade, before Britain sinks to being only the tenth largest economy, and possibly even just the fifteenth largest economy behind places like South Korea and Mexico.

But, what is more, looking at the ranking of the UK economy, on the basis of the relative sizes of different national economies is itself misleading, precisely because the global economy has long since gone past the stage of such national economies, and instead been divided into competing regional economic blocs. In fact, a look at the world ranking of economies provided by Wikipedia, shows the world's largest economy being not the US, but the EU, with a GDP of $18.5 trillion, or about 25%, of global GDP.

An independent UK economy with its GDP of just $2.9 trillion, would then appear as a rather insignificant minnow squeezed between the EU economy of $18.5 trillion, and the US economy of $18 trillion. It would be rather like the little corner shop, squeezed between a giant Tesco at one end of the road, and a giant Sainsbury's at the other, and all the time, it would be seeing its position deteriorate, as other large supermarkets opened around it, and other independent traders grouped together in larger associations. In fact, it was precisely for that reason, that the EU was formed so that the individually small economies of Western Europe, could create a much larger single market so as to compete with the rise of the naturally, and geographically much larger single market of the United States.

But, even the giant US economy no longer stands alone, in this new global economy divided into large economic blocs. It has joined with Canada and Mexico to form NAFTA, with a combined GDP of around $20 trillion. It is a market of around 470 million people, compared to the market of around 500 million people in the EU, and 1.4 billion in China. By contrast, the UK has a domestic market of just 60 million people.

And that message, that the days of the individual national economy are long dead, has not been lost on all of those in the newly rising economies. In South America, Mercosur has been established. It has a domestic market of around 290 million people, and a GDP of around $ 4 trillion. In South-East Asia, ASEAN has a domestic market of 625 million people, and a GDP of $ 2.8 trillion.

Some of the world's fastest growing economies today are in developing sub-Saharan Africa. Ethiopia, for example, grew in 2014/15 by more than 10%, and it has grown by around that amount for the last decade, other than for 2008, when it grew at 8.8%, and 2011, when it grew at 8.7%. Along with it have arisen a number of African economic blocs. The Organisation of African Unity aims at establishing something akin to the EU, across Africa by 2030, which is probably an ambitious target, but it indicates the direction of travel for global economies, and it is a direction of travel that the Brexiteers are moving in the opposite way from.

So, the Brexiteers talk about the UK as the world's fifth largest economy is entirely misleading because it fails to take into consideration the actual relative strength of the UK economy not only compared with its main competitors, and with the direction of travel of these different economies, but more importantly, it fails to recognise that a UK economy standing on its own, would not be competing with these other various economies as individual national economies, but as economies which are themselves integrated into larger economic blocs.

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