Wednesday, 1 February 2012

E7 vs G7

In an interesting article in the Globe and Mail, Ranga Chand makes a good argument for how the Group of 7 (G7) countries of Canada, France, Germany, Italy, Japan, the U.K.and the U.S. are being out paced in economic growth by the Emerging 7 (E7) countries of China, India, Indonesia, Brazil, Russia, Turkey and Mexico. As he points out, these countries now account for close to 31 per cent of world GDP, up from 19 per cent twenty years ago. During this same time period, the G7 has seen its share of world output fall from 51 per cent to 38 per cent.Over the past 4 years, the growth rates in the E7 countries are astonishing. Except for Canada, the G7 countries have not recorded much economic growth over this period.

While the E7 countries have recorded very impressive recent economic growth, their ability to use monetary and fiscal policy to help steer future economic growth varies considerably.  According to recent research done by The Economist, some of the E7 are in a good position to use monetary and fiscal policy to help shape their economy. The Economist has devised a "wiggle room index" which ranks emerging economies on how much monetary and fiscal flexibility they have. India, Turkey and Brazil are in the red zone (not much wiggle room), Mexico is in the middle of the pack while China, Indonesia and Russia each have plenty of wiggle room.

Rising CO2 emissions from China and India are a concern. Hopefully the Environmental Kuznets Curve (EKC) hypothesis applies to the E7. The EKC postulates a long-run curvilinear relationship between carbon dioxide emissions and income. At first, emission rise with increases in income, but after some inflection point emissions begin to decline.

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