EPIBuilding a Sustainable Future
October 12, 2006
Fueled By Developing Asia, Global Economy Continues to Expand
Elizabeth Mygatt

The world economy grew by 4.9 percent in 2005, down slightly from the 30-year high of 5.3 percent in 2004. Leading the expansion were China, growing by 10.2 percent, and India at 8.5 percent. This recent rapid growth is a continuation of half a century of economic expansion. Gross world product, the total value of all goods and services produced, increased from $7 trillion in 1950 to $61 trillion in 2005, based on purchasing power parity (PPP). Annual income per person rose from $2,923 to $9,440 during this period. Early projections for 2006 and 2007 show sustained growth of roughly 5 percent. (See data.)


Rapid growth in developing Asia is fueling the current expansion. China’s $9.4 trillion economy continued to expand in 2005. The country's 10.2 percent growth was the fastest of the past decade and half a percentage point higher than the 9.7 percent average since 1980. India’s 8.5-percent growth was fueled by rising exports and lively manufacturing and services sectors. Elsewhere in Asia, the newly industrialized Asian economies—South Korea, Taiwan, Hong Kong, and Singapore—expanded by 4.5 percent, down from 5.9 percent in 2004. Japan, the world’s third largest economy, grew by 2.6 percent, the fastest rate in the last decade, driven by rising employment, strong domestic demand, and export growth.

In the United States, which generates one fifth of the world economy, growth slowed to 3.2 percent in 2005. While nearly one point slower than in 2004, this rate was about equal to the average over the last decade. Stronger growth was hampered by a slow fourth quarter, due in part to a steep drop in auto sales as buyer incentive programs expired and already high gas prices soared in the aftermath of Hurricane Katrina. The cooling of the strong housing market in 2006, along with high energy prices, will likely curb future near-term growth.

The Australian economy also grew slowly, expanding by only 2.5 percent, a full point lower than its 10-year average of 3.6 percent. A severe drought in 2006, which is forecast to cut the current wheat crop by roughly half, will likely slow growth there this year as well.

In the European Union, subdued household consumption, unfavorable labor market conditions, and high oil prices led to a much slower output growth of 1.8 percent in 2005.  In fact, Germany, France, and Portugal expanded by less than 1.5 percent each, and the United Kingdom grew by just 1.9 percent. Central and Eastern Europe saw a healthy growth of 5.5 percent in 2005 as domestic demand and exports continued to be strong.

Meanwhile, growth in Russia, Ukraine, Kazakhstan, Belarus, and Turkmenistan slowed from 8.4 percent in 2004 to 6.5 percent in 2005. Growth was checked by a slow energy sector, political turmoil, and economic uncertainties. 

Latin America’s economy grew by 4.3 percent in 2005. Argentina and Venezuela, both growing more than twice as fast as the continental average, led the way at over 9 percent each. Strong global demand for commodities, particularly agricultural goods in Argentina and petroleum in Venezuela, buoyed these exporting economies. Weak agricultural and manufacturing sectors hampered Mexico’s $1.1 trillion economy, which grew by just 3 percent. Weak domestic demand and investment slowed growth in Brazil to 2.3 percent.

High oil prices and record global consumption, exceeding 82 million barrels per day, drove strong economic growth in oil-exporting countries. Economic output in the Middle East grew by 5.7 percent in 2005. The economies of Saudi Arabia and Kuwait, which registered the largest oil production increases in the region, expanded by 6.6 and 8.5 percent respectively.

Meanwhile, the economies of oil-exporting countries in Africa enjoyed a 7.4 percent expansion. As Angola’s oil production expanded by 26 percent, its $43 billion economy grew by 21 percent, the fastest rate on the continent. Nigeria, Africa’s largest oil producer, grew by 7 percent. The African economy as a whole grew by a healthy 5.4 percent in 2005, spurred not only by high oil prices but also by strong non-fuel commodity prices, including metals and coffee. Globally, non-fuel primary commodity prices rose by 10 percent in 2005, driven by a 26-percent increase in metals prices.

One of the most striking aspects of today’s global economy is the fast-growing international economic imbalance. With a heavy import bill, the United States added on average more than $2 billion a day to its fiscal deficit, accumulating an economic shortfall equal to 6 percent of its GDP in 2005. Meanwhile, 6 countries ran budget surpluses in excess of $50 billion, with Japan’s and China’s both exceeding $160 billion. These expanding imbalances, due in large part to international financing of U.S. debt, may create instability in the economy.

The global economy is also plagued with inequalities. Per capita GDP ranges from less than $600 annually in Malawi to more than $40,000 in Ireland, the United States, and Norway. While the world is experiencing steady growth, many people still live in deep poverty. According to the United Nations’ Human Development Report 2005, while 20 percent of the world’s people live on less than $1 a day, another 20 percent live in nations where people do not think twice about spending $2 on a cappuccino. At the extremes of this imbalance, the 500 richest people in the world have a larger combined income than the poorest 400 million.

These inequalities are found not only among countries but also within them. In China, for example, the average urban resident earns more than three times as much as a typical farmer, and this urban-rural gap is widening. In Brazil, the richest 10 percent of the population takes in nearly half of the country’s income, while the poorest 10 percent shares less than 1 percent. These growing income gaps make it difficult for economic growth to contribute to poverty reduction.

More broadly, GDP growth overstates progress because it both includes detrimental costs, such as those associated with pollution emissions, and does not account for the long-term damage to the natural systems that form the foundation of our global economy. Falling water tables, rising levels of atmospheric carbon, shrinking forests, expanding deserts, and collapsing fisheries are among the trends indicating that our current economic model cannot sustain progress indefinitely.

The expanding global economy, though seemingly robust, belies the instability of our widening international imbalances and increasing income gaps within countries. These inequities will make it more difficult for people to rise out of poverty and for failing states to turn themselves around. Overlooking the destruction of environmental supports will weaken the economy. This, combined with growing inequalities, will fuel social unrest and may eventually undermine the global economy itself.

Copyright © 2006 Earth Policy Institute

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