The global economy’s long-term prospects look rosy. But beneath the glow, there is plenty of turmoil. As growth trends shift, intensifying inequality and unrelenting environmental damage could derail the economic engine.

A new report by the World Bank attempts to imagine how the global economy will develop in the next 25 years. It foresees a world that is increasingly integrated and prosperous, with developing nations taking a more prominent role in the global economy as a source of both supply and demand.

But the report also warns that pro-gress could bite back. Economic inequality could spark civil unrest and foster protectionism; untrammelled degradation of the environment could limit growth; and the possible emergence of other global problems, such as a flu pandemic, could knock the economy off its stride.

The report stresses that its attempt to model the future is not a prediction. Actual results may differ materially. But it does attempt to sketch out the broad trends and risks it sees to the world’s economic future.

In its base case, the report says, global economic output could double to US$72 trillion in 2030 from US$35 trillion in 2005, driven by a tripling in global trade to US$27 trillion. This comes at an overall growth rate that’s comparable with that of the past 25 years. But, the report suggests, developing countries will capture an increasingly large share of that growth. It notes that, 20 years ago, developing countries manufactured 14% of rich countries’ imports. Today, that’s up to 40%, and the bank predicts it could grow to more than 65% by 2030.

Developing countries are already growing much faster than developed economies. They probably grew at 7% in 2006 and, while the bank expects growth to slow to 6% in 2007 and 2008, it will still be more than double the 2.6% expected in high-income countries. In the next 25 years, the bank estimates, the developing countries could triple their output — pushing their share of global output to 33% in 2030 from 23% in 2005.

Countries that are already rich but relatively small, such as Canada, could see themselves eclipsed by the fast-growing developing nations in the years ahead. While the positions of the world’s top economies — the U.S., Japan and the larger European countries, which are both rich and populous — look secure, the report predicts that, by 2030, “India would jump three spots from its current 10th ranking [by GDP], essentially swapping spots with Canada.”

Such strong growth in developing countries would have a positive effect on their populations. “The number of people living on less than $1 a day could be cut in half, from 1.1 billion now to 550 million in 2030,” says Fran¡ois Bourguignon, World Bank chief economist and senior vice president of development economics.

The report also imagines that the size of the “global middle class” would triple as a result, to 1.2 billion people from 400 million today.

Such development carries risks, too. “Some regions, notably Africa, are at risk of being left behind,” Bourguignon cautions. “Moreover, income inequality could widen within many countries, compounding current concerns over inequality among countries.”

Economic inequality is increasingly a worldwide phenomenon. In early December, Helsinki-based World Institute for Development Economics published one of the first comprehensive looks at worldwide wealth distribution. It reveals that the richest 2% of adults in the world now own more than half of global household wealth, and the top 1% control 40% of global wealth. By contrast, the bottom 50% represent only about 1% of total wealth.

The vast disparity between the rich and the poor is both a global phenomenon and an internal reality for many countries. On a country-by-country basis, the U.S. dominates the population of the wealthiest 1%. It accounts for 37% of the top 1%, followed by Japan at 27% and Britain at 6%. Canada accounts for 2% of the wealthiest 1% — meaning it punches far above its weight per capita, since it represents only about 0.4% of the world’s population. But Canada still lags the U.S., which accounts for 4.7% of world population.

The big difference between the U.S. and the rest of the world is the significance of financial assets as a share of overall wealth.

In Canada, real property accounts for about 70% of assets; financial assets make up 30%. This is similar to the asset mix in Japan, and slightly more skewed toward financial assets than in Germany. Less developed countries such as India have almost 100% of assets in real property, with negligible financial assets. The U.S. stands apart, with less than 60% of assets in real property and more than 40% in financial assets.

@page_break@The increased importance of financial assets in the accumulation of wealth echoes what has been observed about the shift in the composition of incomes in the U.S. and, to a lesser extent, Canada and Britain in the 20th century.

In the early part of the last century, the rich were rich because they owned property, which generated outsized incomes for them. In the past few decades, however, a shift occurred: employment income — both cash compensation and, more recently, options and other forms of share-based compensation — became the predominant source of wealth.

Joint research by Thomas Piketty at Paris-based l’Öcole des hautes »tudes en sciences sociales and by Emmanuel Saez at the University of California at Berkeley found that income data suggest “that the large shocks that capital owners experienced during the Great Depression and World War II have had a permanent effect on top capital incomes.”

The researchers also found that top wage shares have surpassed their pre-war levels. As a result, the working rich have replaced those who live on income from property or investments at the top of the income distribution.

Not only are these high-paid professional managers putting increased distance between themselves and their fellow countrymen, but they are also driving globalization — the key trend shaping the global economy in the next 25 years, suggests the World Bank. As companies become more ruthless about labour costs, they seek ever-cheaper ways to produce their goods and services to maximize the bottom line — and boost management compensation — which, in turn, is driving the trends toward outsourcing and sending work offshore.

That shift has many benefits. Top executives boost profits and their own pay, workers in developing countries are pressed into higher-paying jobs, now-redundant workers in rich countries are forced to upgrade their skills and seek higher-value jobs.

That’s the Pollyanna version of the globalization story. And, while there is much to be said for it, it must be remembered that many of the adjustments are wrenching for the firms and individuals involved, and have spinoff consequences.

Indeed, the World Bank report warns that the next wave of globalization will probably intensify stresses on the “global commons,” which could jeopardize long-term progress, not just in social and economic issues but also health and environmental problems. “The new burden lying on the shoulders of national policy-makers,” the report says, is “to manage globalization, or risk being run over by it.

“This requires government policies to ensure that the poor are incorporated into the growth process through pro-poor investments in education, infrastructure and transfers. Similarly, it requires policies to support and invest in workers — all the while promoting change, not fighting it,” the report continues.

Adapting to changing economic conditions, rather than aiming to avert change, is required. It calls for stronger international institutions to respond to global problems, reduced trade barriers and more and better development assistance.

The report also notes that global warming is a serious risk. It warns that without policy action, annual emissions of greenhouse gases will increase by roughly 50% by 2030 and probably double by 2050. It calls for government policies that promote “clean” growth, assistance to poor countries to enable them to grow more cleanly and to integrate them into a global market for carbon finance.

Indeed, the World Bank counsels that more co-ordinated efforts will be needed to address various problems that stretch beyond national borders: “Nations will have to work together to play a larger role in issues involving global public goods — from mitigating global warming to containing infectious diseases like avian flu to preventing the decimation of the world’s fisheries.”

The global economy has room to run in the years ahead, but growth is not a given. Governments must face a slate of emerging risks as the world evolves. IE