Russia Riding Roughshod over Europe: 2050

According to a New Price Waterhouse Report, Europe Will Serve a Rough Master

In the year 2050, according to a brand new Price Waterhouse PDF report, Europe will be Russia’s bitch. The projections are tentative, largely linear, and do not make allowance for any “black swan” events. But if the public bites, Price Waterhouse stands to make a lot of money via profitable investment packages in the emerging world, which includes Russia.

As you can see from the table below, Price Waterhouse projects Russia to be the largest economy in Europe in 2050, and China to be the largest economy in the world — in terms of GDP at PPP.

World Economies at 2014 -- 2030 -- 2050 Revenge of the BRICS?

World Economies at 2014 — 2030 — 2050
Revenge of the BRICS?

What is GDP at PPP?

PPP stands for “Purchasing Power Parity,” an economic fictional construct meant to facilitate comparisons of living standards between less developed and more developed nations. It involves determining the number of units of local currency needed to buy “a market basket of goods” compared to the number of units of another country’s currency needed to buy the same “market basket of goods.” The US dollar is often used as a reference currency for the sake of comparison.

There are many problems with the use of “GDP at PPP,” but that does not stop people from using the contrived index whenever it is of some use. Here are a few problems according to Wikipedia’s PPP entry:

In addition to methodological issues presented by the selection of a basket of goods, PPP estimates can also vary based on the statistical capacity of participating countries. The International Comparison Program, which PPP estimates are based on, require the disaggregation of national accounts into production, expenditure or (in some cases) income, and not all participating countries routinely disaggregate their data into such categories.

Some aspects of PPP comparison are theoretically impossible or unclear. For example, there is no basis for comparison between the Ethiopian laborer who lives on teff with the Thai laborer who lives on rice, because teff is not commercially available in Thailand and rice is not in Ethiopia, so the price of rice in Ethiopia or teff in Thailand cannot be determined. As a general rule, the more similar the price structure between countries, the more valid the PPP comparison.

PPP levels will also vary based on the formula used to calculate price matrices. Different possible formulas include GEKS-Fisher, Geary-Khamis, IDB, and the superlative method. Each has advantages and disadvantages.

Linking regions presents another methodological difficulty. In the 2005 ICP round, regions were compared by using a list of some 1,000 identical items for which a price could be found for 18 countries, selected so that at least two countries would be in each region. While this was superior to earlier “bridging” methods, which do not fully take into account differing quality between goods, it may serve to overstate the PPP basis of poorer countries, because the price indexing on which PPP is based will assign to poorer countries the greater weight of goods consumed in greater shares in richer countries. __

More problems with PPP

So What Are We to Think About Russia in Light of all This?

According to Price Waterhouse, Russia will have the strongest economy in Europe in 2050, and will be able to use its energy spigots to control its virtual conquests to the west. But what do the facts on the ground say?

Russia is Still in Decline

There is an urgent shortage of engineers, researchers, workers with technical skills, and professional managers

Russia’s per capita GDP projection for 2016 is around $8,500, which puts the country at around 70 in the International Monetary Fund’s world rankings, alongside Turkey, Mexico, and Suriname.

… a substantial part of Russia’s production capacity (more than 40 percent by some estimates) is both technologically and functionally obsolete and cannot produce competitive and marketable products. For instance, Russia’s machine stock has shrunk by almost one-half in the last ten years—a problem that is only in small part explained by old, inefficient machinery being replaced by new high-tech equipment.

The Russian economy badly needs to rapidly capitalize production and build new capacity, and the state simply lacks the money to accomplish this goal. Private investors consider it too risky to invest in Russia, with the result that only a tiny fraction of the necessary capital comes into Russia and that mainly in areas as retail trade, logistics, and the assembly of very simple goods with the lowest added value.

… Russia also increasingly lacks labor resources, which are falling at the rate of 0.5 percent a year for natural demographic reasons (see figures 7.1, 7.2, and 8). Moreover, most of these workers are employed in spheres with zero or very low value added, such as the public sector, private security, retail, and the extremely inefficient banking sector. The remaining employees do not have skills the state needs. There is an urgent shortage of engineers, researchers, workers with technical skills, and professional managers.

… We can expect a gradual and gentle decline in all Russia’s economic indicators in 2017. __ Decline, Not Collapse

For a much more in depth multi-dimensional report on the ongoing Decline in Russia, consult these special reports.

The Same Report Says that China Will Rule the World in 2050

But how realistic is that prediction, given the massive debt, pollution, and capital misallocation problems that continue building inside the Middle Kingdom?

The SOEs are an albatross around China’s economic neck, yet even the increasingly powerful Xi, recently crowned China’s “core leader,” has been unable to shut most of them down. The management, ownership and finances of many private businesses also are opaque. Often, businesses that are nominally private are actually owned by the government through a complex chain of holding companies. This is particularly the case with respect to firms in the high-tech and aerospace sectors.

The era of untrammeled Chinese economic growth appears to be over…

… __ About China? Think Again

It is difficult to make successful predictions, particularly regarding the future. When the deep level realities of a nation such as Russia do not correspond to the “rose coloured glasses” projections of an investment management entity, wise readers would do well to maintain scepticism.

The same, of course, applies to predictions of all types that extend decades or centuries into the future. Be very sceptical.

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1 Response to Russia Riding Roughshod over Europe: 2050

  1. Matt Musson says:

    Russia is an economy totally reliant on oil. China is borrowing and spending the equivalent of the Obama stimulus ever 28 days. Russia will go into decline but China will fail spectacularly.

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