Notes from a lecture by Martin Wolf CBE
The Great Convergence: India, China and the Future of the World Economy
Leeds University Business School, 31st October 2011
1.
The Great Convergence
During the late 1970’s a process of convergence in growth rates started between the developed and less developed
countries. However since the 1990’s there has been a new divergence, in favour of developing countries, that is now
greater than ever before. If growth rates continue it is predicted that the ‘emerging economies’ will double in size every
twelve years. The lead in this exceptional performance has come from Asia, especially China and India. Although many
countries, such as Russia and Brazil, have experienced high growth rates, only China and India have maintained a
consistent positive trend growth rate.
Shares in World Output (PPP adjusted)
1990
2000
2010
2016
Developed countries
China
India
Developed countries
China
India
Developed countries
China
India
Developed countries
China
India
70%
4%
4%
68%
7%
4%
50%
14%
6%
45%
18%
7%
GDP per head relative to US levels at PPP
China
 1980
3% of USA
 2016 24% of USA
India
 1980
4% of USA
 2016
16% of USA
Different Patterns of Growth
 China invests more although India is catching up
 China is more reliant on industry and India services
 China saves enormously, India less so
 China is building up a huge trade surplus through export led growth. India’s growth is driven more by domestic
consumption.
Gross Investment as a % of GDP
China 1980:
30%
2010: 50%
India 1980:
20%
2010: 36%
 UK’s current level is 14% of GDP
 Both India and China have a capital output ratio of approximately 4. This suggests that India could grow by 8%
annually and China 12%
Savings Rate as a % of GDP
China
1980: 35%
2010: 53%
India
1980: 20%
2010: 35%
Current Account as a % of GDP
China
1980: 0%
2010: 5%
India
1980: -1.5%
2010: -2%
Merchandise Exports as a % of GDP
China
1980
5%
2010
28% (reached 35% in 07)
India
1980
5%
2010
11%
Currency Reserves
 China holds approximately $3,250 billion
 India only holds a fraction of this amount
Overall
 Both countries are growing quickly but in different ways.
 Both are still relatively poor countries with potential for a massive ‘catch up’
 Both have room for improvement in many ways. For example, in terms of ‘ease of doing business’ – China is
91st in the world and India 132nd
 The future of both will partly depend upon political stability and continued investment in physical and human
capital.
India and China and the Global Economy
Both countries are transforming the workings of the global economy
Energy use per head (kg of oil per head)
China
 1990
1049
 2008
1871
India
 1990
375
 2008
545
USA
 1990
7672
 2008
7503
Growth of Merchandise Export Volumes 2000 -2009
 China 22% a year
 India
12% a year
 USA
4% a year
 UK
1% a year
China now accounts for 13.3% of world merchandise exports. The entire EU accounts for only 15.1%
The Great Adjustment
The two Asian giants are likely to continue to grow much more quickly than the high income countries. This will create
huge challenges for the global economy.
a) Managing Resource Dependency
Resources are likely to be more expensive over a lengthy period of time. This will impact particularly on oil and food
prices. This will further improvements in the terms of trade for resource exporting countries. Perhaps there is a need
for a global investment regime to oversee the use of natural resources
b) Sustaining and Maintaining Open and Multilateral Trade
Challenges in terms of encouraging free trade and avoiding ‘creeping protectionism’
c) Adjusting the Global Monetary Order
A need for cooperation on exchange rate systems and a likely reduction in the dominance of the $ as the key global
currency
d) Reweighting Power in Global Institutions
A need to reform voting power in institutions such as the IMF and a possible shift in leadership of the IMF