HSBC's forecast for "The World in 2050"

Jealous of Goldman Sachs, HSBC has just published its own sweeping report on "The World in 2050"

The report is quite good, well written and argumented and based on a broadly correct model.

Alas, the report, like many others, is wrong about Poland and New Europe.

It projects that in 2050 Poland's economy will be ranked only in the 24th place globally in terms of its size, no change relative to today, behind Egypt, Argentina, Malaysia, Thailand and even the Netherlands.

The projections are based on a Barro-inspired macro model, which takes into account the starting level of GDP per capita (since it is easier for poorer countries to grow faster than it is for richer ones) and assumptions as to the demographic trends, the quality of human capital and economic governance.

Let me explain why these projections for Poland are wrong.

The main reason why Poland is projected not to do too well in the future is the expected demographic decline. The model assumes that the fertility rate in Poland will remain low at 1.3 and that there will be no immigration. Both assumptions are incorrect.

First, the fertility rate in Poland is already increasing, exceeding 1.4 in 2009, up from 1.3 in 2003. What is more important, pressed by the society and rising future pension costs, the Polish government will have no choice, but to enhance its pro-family policy (I admit though that some serious pushing will be needed). It is already happening, with, for instance, the new law on infant care, but much more is to come soon. As a result, fertility rates will increase, although I am convinced that for social reasons (the fact that the social role of women in Poland has permanently changed), the fertility rate will never exceed 2.0 again.

Second, Poland is set to become a big recipient of immigrants, reversing the 300 year old trend. This is because with rising income Poland will become more and more attractive. When Poland's GDP per capita rises above 70% of the EU average, similarly to Spain in the mid-1990s and the Czech Republic recently, it is likely to start receiving substantial immigration flows. I bet that by 2030 at least two million immigrants will have arrived to stay. More immigrants will come later, legal or illegal.

As a result, the projected demographic decline in Poland will not happen.

There are also other reasons why the projection for Poland is too pessimistic.

First and foremost, HSBC model understates the historically unprecedented increase in the quality if human capital in Poland and the permanent improvement in the quality of governance, owing to the EU accession.

As to the former, the model ignores increasing returns from the fact that already today almost 20% of population has a tertiary education degree, up from 7% in 1989, and that the ratio will steadily increase as Poland continues to churn out 2 million of graduates a year (maintaining 18-24 scholarization ratio above 50%). These millions of newly educated people only now enter the labor market; and they will be there for another 50 years to come, producing the Polish growth miracle and its real XXI century Golden Age. Separately, I also think that the used data on average years of male schooling taken from Barro and Lee database are off the mark (mostly outdated). It would be better to take the most recent PISA OECD data, measuring educational outcomes rather than inputs, which shows that functional literacy of Poland’s 15-year olds is higher than the OECD average, despite Poland’s GDP per capita and educational spending being at the very bottom of the group (you could say that we are producing pretty intelligent young people on the cheap).

As to the latter, the quality of economic governance (including rule of law etc), the soulless HSBC model does not take into account the much lower risk of policy reversals in Poland relative to other emerging markets, courtesy of the EU straitjacket (just see what happens to Orban’s Hungary...). The historical, structural and permanent break in governance scores is ignored, understating the projected growth rates for Poland and overstating these for other emerging markets. Finally, it is simply wrong for HSBC to crunch numbers based on the assumption that Poland’s rule of law is of the same quality as in Turkey and that it is weaker than in Saudi Arabia or China (really?). But this is a minor quibble relative to all other objections, which--granted--would apply to most/all long-term macroeconomic models (with the HSBC model likely being one of the best).

See more arguments in my Golden Age paper. I will also write more about it in the upcoming sequel soon.