The World Economy

The world economy is the sum of the economies of about fifty states and a scatter of smaller ones, home to approximately 8.4 billion people and producing approximately A£160 trillion a year when every country’s output is converted into American pounds at the exchanges. It is measured in the American pound because that is the currency in which the world settles its accounts, prices its commodities and keeps its reserves, and every comparison on this page is made in it.

Two league tables describe it, and they disagree. Measured by nominal value, at the exchanges, the largest economy is the United Kingdom of America, at approximately A£28 trillion, about a sixth of the world’s. Measured by total output, valuing what each country makes at its own prices, the largest is the Empire of China, at approximately A£42 trillion, half as much again as the Realm. Both figures are honestly arrived at, and each government quotes the one that flatters it: Peking counts what its people make, and New Westminster counts what it is worth on the exchanges. Neither may claim the crown without naming its measure.

Below them the order is less disputed and more interesting. The Kingdom of Arabia is the third economy of the world by value, on the oil of the peninsula and the Gulf; the German Empire, the principal industrial power of the European order, is fourth; Russia, poor per head and enormous in extent, is fifth by value and level with Arabia by total output; and the Raj, the most populous state on earth, is seventh by value and third by total output, which is the single most economically important gap in either table. The richest places to live are not the largest economies. The Realm, which leads the world by value, is not the richest place in it per head, and has long been quietly self-conscious about the fact.

The two measures

Nominal value converts each country’s output into American pounds at the market rate of exchange. It is the measure of what an economy is worth to the rest of the world: what its output would buy abroad, what its debts are worth to a foreign creditor, how much of the world’s trade it can pay for. It flatters countries whose currencies are strong and whose prices are high, and the Realm, whose currency is the world’s reserve and whose prices are high, is the country it flatters most.

Total output values what each country produces at its own prices, so that a haircut in Madras and a haircut in Chicago count as the same haircut. It is the measure of what an economy makes for its own people, and it flatters countries where prices are low, which are mostly the poorer and the more populous. For the rich states of the Atlantic and northern Europe the two measures barely differ, because their prices are close to the Realm’s. For the middle-income states they differ by a half or more, and for the poorest by a factor of two or three.

The gap between the measures is therefore a rough measure of how cheap a country is, and in the two largest Asian economies it is the whole story. China’s output is worth approximately A£20 trillion at the exchanges and approximately A£42 trillion at its own prices. The Raj’s is worth approximately A£7 trillion at the exchanges and approximately A£24 trillion at its own prices: by one measure it sits behind Japan, and by the other it sits close behind the Realm. Its two figures describe the same country at the same moment, and the distance between them is what economists mean when they call the Raj an uneven economic superpower.

The argument about which measure is the true one is old, political and unresolvable. Each is the right measure for a different question. A government that wants to know how many warships its rival can buy abroad uses nominal value; a government that wants to know how many people its rival can feed, house and employ uses total output. The Realm’s statisticians publish both, and so does Peking’s Imperial Bank, and each capital’s press reports the other’s figure in the second paragraph.

The league tables

The tables below rank the sovereign economies. Constituent nations, such as the kingdoms of the German Empire and of Great Britain, are counted inside their states; the Scandinavian and Benelux unions are confederations of sovereign states and are discussed separately below. All figures are approximate and rounded to two significant figures.

By nominal value

The first twelve hold about seven-tenths of the world’s output by value. The Realm and China between them hold almost a third. Italy, New Albion, the Byzantine Federation and New Wessex follow, each at about A£3 trillion.

By total output

By total output the populous middle-income states rise and the rich small ones fall. Russia climbs to share fourth place with Arabia, Brazil passes Japan, Mexico passes Great Britain, and the Byzantine Federation enters the table. Just outside it stand Egypt and the Sudan and Persia, each at about A£4.5 trillion.

Income per head

Income per head ranks the world differently again, and it is the ranking the Realm likes least. The richest large economy per person is the German Empire, at approximately A£84,000, a little above the Realm’s A£80,000, and the coordinated German model distributes it more evenly. Above Germany stand only the two northern confederations: the Scandinavian Union, at approximately A£90,000, whose accounts include the pooled revenue of the Kalmar Fund, and the Benelux Union, at approximately A£85,000. New Wessex, a federation with a great deal of ground under it, stands level with Germany. Several constituent states run higher still, the richest German grand duchies above A£95,000 and the Realm’s own New Jersey at approximately A£115,000, but they are parts of larger wholes.

The Realm sits level with England and Switzerland, and a little above Great Britain as a whole. It is the largest economy in the world by value and not the richest place in it to live, and its statisticians are the first to say so.

The middle of the table is crowded and the bottom is very far down. Most of Latin America, the Balkans, the Levant outside Arabia’s oil, and the industrialising states of Asia sit between about A£10,000 and A£35,000 a head. The poorest large states, in Africa and in parts of Asia, sit below A£5,000, and the poorest of them, Ethiopia, at approximately A£1,200, has less than a sixtieth of the Realm’s income per head by value. The range between the richest and the poorest large states is wider than it was a century ago, though both ends are far richer than they were.

The world’s people

The world holds approximately 8.4 billion people. More than four in ten of them live in two states: the Raj, at approximately 2.0 billion, undivided since its constitution of 1947, and China, at approximately 1.5 billion. Then comes a long gap, and a cluster of large states between about 150 and 350 million: the Realm and Russia, each at approximately 350 million; the United States of Indonesia, at approximately 280 million; the Federal Kingdom of Nigeria, at approximately 230 million; Arabia, at approximately 220 million; Brazil, at approximately 215 million; the East African Federation, at approximately 190 million; and Egypt and the Sudan, at approximately 160 million.

About 7.6 billion people live in the states the Register describes. The remaining 0.8 billion or so live in much of Africa south of the Sahara and in a scatter of smaller states in Asia, the Balkans, the Caribbean and the Pacific, which together produce perhaps A£3 trillion a year by value.

The demographic map is changing faster than the economic one. Japan is shrinking, and Europe has been below replacement for half a century and is ageing steadily. The young populations are in Africa, the Raj and the Levant, which is where the world’s labour force will grow for the rest of the century and where the question of whether there will be work for it is sharpest. Egypt’s central problem, a hundred and sixty million people on a habitable fraction of their territory, is the world’s problem in small.

Money

The American pound

The American pound is the principal reserve currency of the world. Foreign central banks hold it, oil and metals are priced in it, sovereign debt is issued in it, and a very large share of cross-border settlement passes through it. It acquired the position in the middle of the twentieth century, when the Realm came out of the Second Great War as the leading power of the monarchical world with its industry intact and everyone else’s in ruins, and it has kept it since.

The privileges are considerable and are resented abroad in the ordinary way. The Realm borrows more cheaply than its finances would otherwise justify, is insulated from the currency crises that afflict other economies, and can set its interest rates with less regard to the exchange rate than any other country. The cost is a permanently strong currency, which the Realm’s manufacturing polities have been complaining about for fifty years. The Royal American Reserve, which issues it, is therefore the most closely watched central bank in the world, and its published letters to the Chancellor are read in every finance ministry on earth.

Sterling and the pound’s sisters

Sterling is the second currency of the Crown and the senior partner in the most consequential currency relationship in the world, the strangest one too: two currencies sharing a monarch, a name and a great deal of history, managed by two independent central banks with different mandates. The American pound is the senior of the two, as a matter of weight rather than of protocol, and when they diverge it is generally sterling that moves.

The Crown’s smaller realms and dependencies keep currencies of their own at par with one of the two. Guernsey, Jersey and Man issue pounds at par with sterling, Gibraltar and Malta keep theirs at parity with it, and the Crown’s sister realms peg to the American pound and are not consulted on its rate. A single Crown currency has been proposed in every generation since the 1920s and attempted in none, because it would require one realm to give up its monetary policy, and the answer to which one has never been available.

The mark and the Concert’s mechanism

The German mark is the anchor of continental Europe. Mitteleuropa, the German economic system in the east, kept currency arrangements around the mark for most of the twentieth century, to which the eastern currencies were pegged, and the European Concert took them over at its founding in 2027, moved them to Luxembourg, and opened them to every member. The exchange-rate mechanism that resulted keeps narrow bands around the mark. Germany, the Benelux states, Denmark, the United Baltic Duchy and Poland-Lithuania are inside it; France, Italy, Spain, Austria-Hungary, Sweden and the rest of the continent are outside. It is, in the polite phrase, a German zone, and the decision to seat it at Luxembourg rather than at Frankfurt fools nobody.

There is no common European currency, and the Concert’s treaty does not provide for one. The mark’s reach runs further than the mechanism’s: Kamerun’s currency has been pegged one to one to the mark since 1955.

Pegs, boards and floating currencies

Outside the pound’s realms and the mark’s zone, the world’s currencies float, peg or are governed by boards. Singapore’s dollar is issued by a currency board against a basket. The Persian rial stands on a sovereign fund held largely in American markets. The Chinese yuan is issued by the Imperial Bank of China. The weaker currencies of Latin America count in thousands to the pound, the Granadine peso at about three thousand, and the federal colón of Central America at about twelve.

Blocs and arrangements

The world has one deep economic union and several shallow ones. The European Concert, founded at Straßburg in 2027, binds seventeen seats into a single market with a parliament, a commission and a court, and is the only arrangement on earth in which sovereign states have pooled the regulation of their markets under a common judge. Its first great test, the Brunswick Motor Works case before the Court at Vienna, asks whether a German state may keep a works open against the freedom of capital, and its answer will say a good deal about whether the union is a frame for Germany or a cage.

The Scandinavian and Benelux unions predate the Concert and sit inside it, each casting one vote for several states. The Indochinese Union is an economic union of one communist republic and two kingdoms, which works because it touches nobody’s politics. The Commonwealth of Nations is an association, not a bloc: it decides nothing, which is why it survives.

The Realm belongs to no economic bloc. It trades with everybody and negotiates with each, and its external economic policy has for eighty years been organised around a confrontation, the cold war, that has now faded. Its trade with Russia has been small for the whole of that time, which is the clearest economic residue of the cold war and the thing most likely to change since the decree of 24 October 2028 that opened Russia’s talks with the Concert.

Rents and funds

A large part of the world’s wealth comes out of the ground, and the states that hold it have handled it very differently.

Arabia is the world’s great rentier economy: the oil of the peninsula, the Gulf and Mesopotamia makes it the third economy of the world by value, with an income per head above Japan’s and a human development level below what that income would suggest, because a rent concentrates where earned income spreads. Persia is the counter-example. Its oil and gas are owned and worked by the National Persian Oil Company, its surplus has been held since the 1970s in a sovereign fund placed largely in American markets and insulated by statute from political raiding, and it entered the present century without the debts that comparable producers carry. It is the wealthiest state per head of its size in its region.

The Kalmar Fund is the northern version. The Scandinavian Union pools the oil revenue of the North Sea and the Norwegian shelf in a common fund, and the Union’s own accounts count the Fund’s revenue, which no member counts in its own. That is why the Union’s output, approximately A£2.4 trillion, is larger than the sum of its five members’ by about a fifth, and why the Union’s income per head stands above Germany’s while none of its members’ does; Sweden’s comes level. A country of five million people with Norway’s oil would have been the richest in Europe by a wide margin; the Union decided in the twentieth century that it would rather be five countries sharing it.

Elsewhere the rents are smaller and less carefully kept. New Granada’s richest state is Venezuela, on the Maracaibo fields. The Andes of the Peru-Bolivian Confederation and of Chile hold a large part of the world’s copper and lithium, and the richest mine in the world, at Grasberg in Indonesia, sits among some of the poorest people of that federation, which is a fact about the world economy as much as about Indonesia.

A short history

The age of gold, to 1914

The world economy of the nineteenth century ran on gold and on two pounds. Sterling was the currency of the City of London and of the century’s greatest trading empire. The American pound, decimal from the 1790s, a hundred and eighty years before sterling, was the currency of a continental realm that grew through the century into the largest economy on earth while remaining under the same Crown, and by 1914 the Realm’s output far exceeded Britain’s. The two currencies were tied to gold and therefore to one another, and the question of which was senior did not need answering while both were as good as the metal.

The wars and the Depression

The First Great War of 1914 to 1918 made the Realm the arsenal of the alliance and the world’s creditor. It came out of the war with the largest economy in the world, and then stayed outside the League for twenty years and declined to use its weight. The Depression that followed was the world economy’s great failure and the Realm’s own. The Reserve tightened when it should have loosened and defended the gold parity while the parity strangled the economy, the Realm’s output fell by roughly a third, and the collapse travelled outward through every economy that held pounds or sold to American buyers. The Realm left gold in the 1930s, as part of the reform ministry’s answer to the Depression.

The pound’s century

The Second Great War ended the argument about seniority. The Realm emerged with its industry intact and the industries of Europe and Asia in ruins, the American pound became the reserve currency of the world, and the postwar recovery of Europe and Japan was financed in it. The long cold war that followed divided the world economy along a line that was political rather than economic: Russia traded little with the Allied states, the constitutional states traded a great deal with one another, and the pound and the mark became the two anchors of the half of the world that was open.

The Great Inflation of the 1970s was the second great failure, broken in the Realm from 1977 by a Reserve Governor who raised rates until the recession came and did not stop, and broken across the world in the years after as other central banks followed. The financial crisis at the end of the first decade of this century was serious everywhere, and in the Realm milder than it might have been, for reasons the Realm’s bankers prefer to attribute to their prudence and its regulators to its laws: banking kept separate from investment, conservative mortgage rules, and a mutual sector and a Postal Savings Bank that held a large share of ordinary savings.

The present

The present world economy is shaped by three facts. The first is China, which by total output has passed the Realm and by nominal value has not, and whose rise is the largest change in the world economy since the Second Great War. The second is the fading of the cold war, which removed the discipline that had held the Allied economies together and made possible, in the European Concert, the deepest union of sovereign markets ever attempted, built to bind a victorious Germany and a rehabilitated France before the old rivalries could stir again. The third is Russia, the largest economy that has stood outside the open world for a century, whose President’s decree of 24 October 2028 announced talks on the Concert’s offer of association, and whose opening, if it holds, would be the largest addition to the open world economy since China’s.

Inequality and development

Income is distributed more evenly in the rich world than in the poor, and more evenly in Europe than in the Realm. The Scandinavian Union, with a Gini coefficient of 0.25, and the coordinated economies of Germany and the Low Countries, at about 0.28, are the most equal large economies on earth. The Realm, at 0.32, is richer and rougher than Europe and fairer than its own history would suggest, because its Rights Act makes health, housing and schooling enforceable entitlements rather than policies. Great Britain and England, at 0.34, are the most unequal of the large rich states. The widest gaps are in the uneven giants and the resource states: South Africa, at 0.52, is the most unequal economy of any size, and Latin America, the Raj and the oil states follow.

Human development, which combines income with health and schooling, tracks income closely at the top and less closely below it. The richest states stand between about 0.93 and 0.96; Germany, at 0.950, stands above the Realm’s 0.946, which is the Realm’s own measure of the gap between being the largest economy and being the best place to live. Lower down the table, welfare does more than income: Cuba stands well above its income, and Arabia below its own.

Trivia

See also

• The American pound, the world’s reserve currency
• The Royal American Reserve, which issues it
• The economy of the United Kingdom of America, the largest by nominal value
• The Empire of China, the largest by total output
• The European Concert, the world’s one deep economic union
• Nations of the World, every state the Register describes

The World Economy · Money · Trade · World Institutions