Structure of the Presentation
1.
2.
3.
4.
5.
6.
7.
Brief Historical Overview
Present and Future Trends
Historical Experience of Power Shifts
Positive and Negative Impact for the World
Frictions
What Has to be Done?
What are some of the Longer term
implications?
1. Brief Historical Overview






Both are Millennial Civilizations
Were Largest Economies of World for
First Three Quarters of Last Two
Millennia
Both Missed the Industrial Revolution
Fell behind Rising European Powers
Major Regime Change in 1950s
Are becoming major world players



Economically
Politically
In education and R&D
2.The Present and Future Trends

The Present



China has already become second largest
economy in world
India is tenth largest
By extrapolation of current trends


China will be as big as U.S. in 5 years in PPP
terms, in 10 years in nominal terms
India will surpass Japan in 2 years in PPP terms to
become third largest economy, in 10 years it will
surpass Germany to be fourth largest economy in
nominal terms
Historical and Projected Growth
in Purchasing Power Parity
90
GDP for BRIC and Top 4 Developed Economies in PPP
30000
80
70
60
20000
Brazil
50
East
West
North
China
India
40
15000
Russia
Germany
30
Japan
10000
United Kingdom
20
United States
IMF forecaste
from 2010-2015.
10
5000
0
0
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
E
20
18
E
20
20
E
GDP in Current International Dollar (billions)
25000
2016E-2020E
based on IMF
average growth
rate from 20112015
Historical Growth and Projections
in Current US$
90
GDP for BRIC and Top 4 Developed Economies in Current US$
27000
80
70
60
Brazil
17000
China
50
India
Russia
40
Germany
12000
Japan
East
West
North
30
United Kingdom
20
China Currency Appreciates by 20%
United States
7000
China Currency Appreciates by 40%
*IMF forecaste from
2010-2015.
10
*2016E-2020E based on
IMF average growth rate
from 2011-2015
2000
0
1st Qtr
2nd Qtr
3rd Qtr
-3000
*Currency appreciation is
expected to reach
20%/40% by 2020E, and
4th Qtr
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
1
20 4
16
20 E
18
20 E
20
20 E
22
20 E
24
E
GDP in Current US$ (Billions)
22000
3. Historical Experience of Power
Shifts is not Encouraging

Rise of new powers lead to frictions over




Wealth (trade and resources)
Power
Security
These tend to degenerate into




Trade Wars
Resource Wars
Cold Wars
Conventional Wars
Rise and Fall of Powers Over Time
Share of Global GDP as a % of World Total 1990 PPP
40.00%
35.00%
France
Germany
30.00%
Italy
United
Kingdom
United States
20.00%
Napoleonic Wars
Axis Title
25.00%
15.00%
10.00%
Western
Europe
Colonial
Expansion
European
Powers
W
W
I
W
W
II
Japan
Cold War
China
India
Former USSR
5.00%
0.00%
0
1000
1500
1600
1700
1820
1870
1913
1950
1973
1998
China SWOT
Strengths
Weaknesses
Strong and capable government
Large, growing unsaturated market
Large skilled labor force
Rapid increase in educational attainment
Very high savings rate
Rapidly increasing technological capabilities
Strong manufactured goods exporter
Strong military
Natural resource poor
Rising income and regional inequality
Rapid deterioration of the environment
Poor rule of law
Real estate bubble
Limited English ability constrain IT enabled
service exports
Opportunities
Threats
Large investments in green technology may
make it a market leader
Development of strong service economy built
on knowledge rather than natural resources
Global warming threatens drought and rising
sea levels
Risk of global protectionist backlash to its
strong export orientation
Risk of pushback from established powers to
its rapid rise
India SWOT
Strengths
Weaknesses
Increasing savings rate
Strong rule of law on paper (but not so much
in practice)
Core of English speaking technical workforce
Strong information enabled service export
Young and growing labor force will give
demography dividend if can be productively
employed
Weak coalition governments with limited
capacity to implement change
Corruption
Natural Resource poor
Weak physical infrastructure
Very low educational attainment
Weak military
Weak and over bloated government
Relatively weak technological capabilities
Opportunities
Threats
Strong potential to build on exports of
information enabled services
Leverage growing labor force with strengthen
education
Leverage its growing innovation capability to
--Improve its competitiveness
--Develop and deliver better goods and
services to its large poor population
Unstable neighborhood
Global warming threatens drought and rising
sea levels
Risk of spreading Naxalite insurgence because
benefits of growth have not trickled down to
rural population
Risk of water war with China
4. Five Positive Impacts





Growing Markets
Lower Prices of Goods and Services for
Importers
Higher prices for natural resource and
commodity exporters
Lower interest rates for world
Financial flows and investments in the
rest of the world
Contribution to Global Growth
Five Negative Impacts





Tremendous competitive pressure on other
countries producing manufactured goods and
services they export
Increase in price on natural resources and
commodities
Downward pressure on wages
Rapid technological catch-up through copying
and imitation, plus now large domestic
innovation effort, and purchasing of high tech
companies
Negative environmental impact, including global
warming
5. Frictions
1.
2.
3.
4.
Trade
Resources
CO2
Geopolitical
5.1 Trade Frictions




Both countries, but particularly China have rapidly
expanded exports
Export expansion is putting strong pressure on
manufacturing (China) and services (India) jobs
around the world
Politically charged in context of high unemployment
in developed countries
Additional frictions




arguments about currency manipulation by China
intellectual property piracy
using access to domestic market to extract technology
purchases of national resource and high technology
companies
China’s Exports Surpassed US
in 2006 and Germany in 2009
Share of Total Global Merchandise Exports 1980-2009
14.00%
12.00%
10.00%
China
India
Germany
Japan
France
6.00%
Italy
United Kingdom
United States
4.00%
2.00%
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
0.00%
1980
% of Global total
8.00%
©cjd
Change in China’s Market Share in
World (Four Global Markets
by SITC Categories 6-8)
Developed
Developed Asia
Developing Asia
Other Developing
1995
2009
%
change
1995
2009
%
change
1995
2009
%
change
1995
2009
6: Manufactured
goods classified
by material
2.0
9.9
390.5
15.9
27.5
73.4
4.2
12.8
207.6
2.0
14.5
7: Machinery and
transport
equipment
1.8
14.2
680.2
8.5
32.8
283.5
1.3
17.3
1216.7
1.1
17.0
8: Miscellaneous
manuf. articles
11.3
27.5
143.2
41.0
52.6
28.4
5.0
17.4
249.8
4.2
25.3
Total for All STIC
Imports from
China
2.9
10.4
258.6
13.4
23.6
76.1
2.3
10.9
356.1
1.4
11.7
%
change
638.0
1498.2
497.5
730.0
Global Trade Imbalances Continue
Ten Largest Tertiary Student Populations
2007
Country
China
US
India
Russian
Brazil
Japan
Indonesia
S. Korea
Iran
Ukraine
25,346
17,759
12,853
% of World
Enrollments*
16.8
11.8
8.5
9,370
5,273
4,033
3,755
3,209
2,829
2,819
6.2
3.5
2.7
2.5
2.1
1.9
1.9
Number Enrolled
The R&D Input Landscape
5.2 Resource Frictions



Both countries are resource poor on per capita basis
(except for coal)
Put pressure on global resources, (energy in
particular)
Access to resources is national security issue for
these countries and raises frictions with rest of world



For example, China relationship with rogue regimes because
it needs their resources
China building blue water navy to secure access petroleum
shipped through Malacca Straits
China claim to islands in South China seas,
Ecological Footprint of Ten
Largest Users of Environment 2007
WWF 2008
Biocapacity vs Ecological Footprint-2007
U.S.
China
Europe
India
Russia
Japan
Brazil
% of World
Ecological
Footprint
13.71
16.32
15.60
5.82
3.47
3.32
3.06
% of World
Biocapacity
10.03
10.02
10.96
4.85
6.74
0.64
14.25
-14.47
-12.49
-3.88
1.54
-4.35
9.66
Net Position as -10.54
% of World
Biocapacity
5.3 CO2 Emissions Frictions






China became larger CO2 emitter in 2008, and largest energy
user this year
India is still far behind, but within 20 years will be in similar
position
By 2035 emissions from China, US, India will be as large as total
emissions by world in 1990 while world needs to reduce
emissions 50% those levels to avoid global warming
Both countries argue that problem is due to prior emissions by
now developed countries and that they are too poor on per
capita basis to incur higher costs of curbing emissions
US has refused to commit to reducing its own emissions unless
China and India also commit—therefore world is caught in
deadlock over C02 emissions
Additional risk that US will impose border tax on carbon content
of imports from China and India which would exacerbate trade
frictions
5.4 Geopolitical

China’s successful authoritarian cum socialist
economy model is gaining adherents



Has performed remarkably well for 30 years, plus much less
affected by crisis
Offers an alternative to Washington Consensus development
model for other developing countries
Concerns about security in access to natural
resources leads it to


Trade with natural resource rich rogue regimes
Strengthen its military capability to ensure supply of natural
resources and project military power to defend its interests
Increasing Frictions Trade & Environment
Trade War
Subsumes:
-exchange rate
-global imbalances
-FDI
China and rest of
world
India and rest
of world
Between China and
India
Friction because of China’s
exchange rate
undervaluation and large
trade surpluses.
Not as likely as China since it
has trade deficits.
Compete in many product
areas. May have diverging
position s in Doha trade
Concern about China
buying natural resources
and technology firms.
Like China, although Indian
state-owned firms are not as
active.
Some competition
-Intellectual piracy
Extensive complaints about Fewer complaints about IP
Chinese IP piracy.
piracy than with China.
Resource Wars
Possibly over energy and
resources, such as over
islands in East and South
China Seas.
Climate Change
Not controlling emissions
will lead to global warming
China argues that it’s unfair Same argument as China, plus
to make it pay for CO2
the fact that it is smaller
since problem was created emitter and a poorer country.
by earlier emissions of
now-developed countries.
Risk of geo-engineering
attempts with unknown
consequences if mitigation
efforts fail
China may go for geoengineering if it begins to
experience negative
consequences of climate
change.
Possibly over energy in
general, and water with
neighbors, including China.
India may go for geoengineering if begins to suffer
costs of climate change.
May become more
problematic as they
compete more in trade.
Yes, especially over water
from Himalayan Glaciers
that feed main rivers in
Asia
Perhaps, because China is
already above global
average per capita energy
consumption and CO2
emissions, while India will
be below global averages
even up to 2035.
Increasing Frictions-Geopolitical/Security
China and rest of
world
India and rest of
world
Between China and
India
Geopolitical Competition
and Ideological War
Note this is also over
human rights, nuclear
nonproliferation, and form
of government.
Yes with respect to
Western democracies and
Japan.
Not so likely with Western
democracies and Japan
because India’s democratic
government and marketoriented system are more
consistent with those
countries.
Yes because of different
ideologies combined with
frictions on borders, water,
and possibly trade.
Security Conflicts
Cyber warfare
Many current cyber
India potentially has great
attacks are traced to China. capability in this area, but
there is little evidence that it
is active.
Possible if frictions
between them increase.
Military Conflict
Possibly over Taiwan or
Possibly with Pakistan
other neighbors in South
because of old rivalries and
China Seas. China’s support unstable region.
of N. Korea is also a
potential problem.
Limited to border frictions
in short run.
Hegemonic War
Perhaps with U.S. in long
term.
Less likely since India is
Hegemonic war between
ideologically closer to existing them unlikely until both
powers and not considered as become dominant powers.
big a security threat as muchlarger China.
Global Governance System


Was set up after WW II led by U.S.
Is having trouble dealing with issues it was supposed
to cover




Does not address major new issues





Trade (GATT/WTO)
Global financial imbalances (IMF/WB)
Security (UN/Security Council)
Climate change
Cyber security
Terrorism with weapons of mass destruction
U.S. which has de facto been main provider of global
public goods (open trading and financial system,
security, technology, education) is overextended and
fiscally constrained
Other countries are not stepping in to provide these
global public goods
7. What has to be done?

Have growing friction points which the international
governance architecture is not addressing


Represent old power structures-need to be rebalanced
Do not cover some of critical global issues such as




International financial system and its regulation
Environment, both from resource use as well as global warming
Developing effective new institutional architecture
will take time and will be messy
Main countries/blocks have to do more at their own
domestic level to manage problems to keep them
from becoming worse
Alternative Scenarios
Environmentally
Sustainable
System
4. Desirable state:
Requires cooperation on
trade, finance, technology,
environment, security,
increased aid for poor
countries, and more
sustainable development
strategies.
3. Alternative
undesirable state:
Protectionism slows
global growth, increases
poverty, ad hoc geoengineering solution to
climate change with
unknown results.
Fractured
Global
Economic
System
Integrated
Global
Economic
System
1. Current
unsustainable state
Moving toward
protectionism, new
financial crisis,
insufficient technology
cooperation, resource
conflicts, negative
effects of climate
change, growing
inequality.
2. Most likely, but
undesirable state
Protectionism and
regional trade/economic
blocks, negative impacts
of climate change. Likely
to spiral into military
confrontations over
resources, exacerbated by
disruptions from climate
change.
Environmentally
Unsustainable
System
Key Tasks

Developing better rules for viability of global system



Rebalancing



Trade deficit countries
Trade surplus countries
Reducing CO2





Very difficult to do through fully representative global forums
Start with agreements among main powers
US
China
India
EU and Japan
But these things are difficult to do for political economy reasons



Involved painful restructuring
Require strong vision and leadership
Also require greater awareness among population at large of what is at
stake
China


Let exchange rate adjust upward
Undertake structural reforms





Reduce savings, increase consumption
Expand social safety need
Promote growth of domestic market
Develop the service sector
Undertake more aggressive action on
increasing energy efficiency and reducing
CO2 emissions
U.S.


Increase personal savings, reduce
consumption
Reduce growing budget deficits




Increase taxes
Reduce government expenditure and improve
efficiency of government spending
Streamline growing entitlement costs
Reduce trade deficit-but through increased
productivity and structural change not
through protectionism
India

Improve government efficiency and effectiveness






Reduce red tape and corruption
Strengthen fiscal stability,
Leverage its growing labor force with more
investments in basic and higher education
Deregulate labor markets and develop competitive
traded sector to modernize economy beyond ICT
enclaves
Improve energy efficiency and reduce CO2 emissions
Learn from mistakes of other developed countries
and China in going for a more environmentally
sustainable development path
EU






Sort out the currency problems of the Euro
Zone
Strengthen fiscal discipline of different
economies and the incentive regime to
ensure it
Improve flexibility of labor markets
Take advantage of realignment of Euro to
strengthen competitiveness
Strengthen European Research Area
Avoid pressures for protectionism
7. Longer Term Issues


Essentially issue of accommodating
large rapidly growing new entrants
Challenges




Competitiveness and economic adjustment
challenge (large global rebalancing of
relative wages)
Addressing increasing global inequality
Finding more sustainable development
models
Dealing with geopolitical competition
Changing Shares of Global Population
Thank You!
Carl J. Dahlman
Georgetown University
carl.dahlman@gmail.com
202 687 8045