The World Economy: From Uni-Polar to Tri-polar

Introduction
For over a century the USA has been the largest economy in the World. Major shifts have however been under way since then. During the last 30 years the weight of the world economy has shifted from the USA and the rich countries of Europe to China and India. These trends will continue in the 21st century, bringing about a historic transformation of the World Economy. The Global economy will change from a uni-polar to a bi-polar one with the emergence of China. This will be followed a decade and a half later by the emergence of India, converting the World economy into a tri-polar one.
The rich countries of Europe have seen the greatest decline in global GDP share by 4.9% points, followed by USA and Japan with a decline of about 1% points each. Within Asia the declining global share of Japan since 1990 has been more than made up by the rising share of China and India. During the seventies and eighties ASEAN countries and during the eighties S. Korea along with China & India contributed to the rising share of Asia in world GDP. Between 1975 and 2002 Japan’s share of world GDP fell by 1% point while that of S. Korea, ASEAN, India and China rose by 1%, 1.2%, 2.2% and 9.2% respectively. Thus India’s gains since 1980 have been much larger than ASEAN & S. Korea but much less than those of China(*).
3.5.2 Uni-polar Global Economy: 2002
At the start of the new millennium the ranking of the 10 largest economies in terms of size is shown in the table 3. USA the largest economy is almost 2 times the size of the next largest economy China and about three times the third largest economy Japan. Thus the size of the US economy is larger than the next two economies combined, revealing clearly the uni-polar nature of the Global economy. The fourth largest economy India is a little over one-quarter the size of the US economy. The next five positions are taken by the big four of Europe: Germany, UK, France and Italy. Brazil and Russia bring up the rear with their joint size less than that of India. In turn the size of these three economies together is less than that of China.
Bi-pole China
Within 10 years the global economy will be transformed from a uni-polar to a bi-polar one. China is projected by us to become the largest economy in the World within 15 years. Though India like the rest of the world has been falling behind China, its share of World GDP will continue to grow. Before the end of the current decade India’s economy will become larger than that of Japan, thus taking it to 3rd place behind USA and China.
We measure the incremental impact of an economy on the rest of the World through trade and financial flow, by change in GDP at current exchange rate. By the end of the decade, China will become a larger driver of global growth than the European Union’s six largest economies. Similarly India will be a larger growth driver than the United Kingdom, the most significant growth pole in the EU. At this time the combined impact of the three Asian giants (including Japan) will exceed that of the USA. The global impact of other emerging economies is relatively small. In 2015, Canada and Russia are ranked 11 and 12 in terms of impact, which is less than a third of that of India at that time. The S Korean economy in contrast comes in at 7th rank with an impact that is half that of India’s. Brazil’s impact is projected to be much lower than that of Mexico.
India: 3rd Pole & Growth Driver
As the share of the USA in World GDP falls (from 21% to 18%) and that of India rises (from 6% to 11% in 2025), the latter emerges as third pole in the Global economy. By 2025 the Indian economy is projected to be about 60% the size of the US economy. The transformation into tri-polar economy will be completed by 2035 with the Indian economy only a little smaller than the US economy but larger than that of W. Europe.
China’s economy is projected to become 50% larger than the US economy by 2025 and almost double that of the USA by 2035. At this point China’s share of the World economy will be equal to the share of the US and Indian economies taken together. All the other countries that are either currently members of the Security Council or aspire to become so will therefore have relatively small shares. Japan the largest among them will have a share of about 5% while the others (including Russia) will each have 2.5% (table 3).
This scenario assumes that China will be able to sustain the ‘FDI-Export’ cum ‘Zero capital cost’ model of fast growth. The ‘FDI-Export’ model transformed ASEAN countries into “Miracle” growth economies, but the Asian crises showed that it is heavily dependent on creating and sustaining optimistic expectations. China’s risk is heightened by it combining with ‘zero capital cost’ to producers of inputs (including infrastructure) that bury inefficiencies in the government banking system (implicit fiscal subsidies). It is however hard to predict what kind of exogenous shock will knock such an economy off the high growth knife-edge path to more normal sustainable growth rates.
By around 2025, China’s impact (in terms of GDP at prevailing exchange rates) on World growth is likely to be larger than that of the USA and India’s impact larger than that of Japan. By 2035 India is likely to be a larger growth driver than the 6 largest countries in EU, though its impact will be a little over half that of the USA. China’s impact will, however be about 40% more than that of the USA.
Conclusion
The projected changes in the relative size of economies will have profound implications for global governance, the global balance of power and the stability of Asia. This phenomenal change in relative power poses major challenge to the economies of Europe, N America, and Asia that very few seem to fully understand or appreciate.

Table : World Share of GDP at Purchasing Power Parity

Current Projected (2002 prices)
2002: Uni polar 2015: Bipolar 2025 2035: Tripolar
Country (Int$bi) Share Rank Share Rank Share Rank Share Rank

China 5861 12.1% 2 19.5% 1 25.2% 1 30.0% 1
USA 10308 21.3% 1 19.5% 2 17.8% 2 16.0% 2
India 2800 5.8% 4 8.2% 3 11.2% 3 14.3% 3
Japan 3425 7.1% 3 6.2% 4 5.5% 4 4.8% 4
Germany 2236 4.6% 5 3.5% 5 3.0% 5 2.6% 5
France 1601 3.3% 6 2.7% 6 2.4% 7 2.1% 8
UK 1549 3.2% 7 2.7% 7 2.3% 8 2.0% 9
Russia 1186 2.4% 10 2.6% 8 2.6% 6 2.5% 6
Italy 1525 3.1% 8 2.5% 9 2.0% 9 1.6% 11
Brazil 1355 2.8% 9 2.2% 10 1.9% 12 1.6% 12
Source: * Virmani, Arvind, "Economic Performance, Power Potential and Global Governance: Towards a New International Order" ICRIER Working Paper No. 150, December 2005

The Role Of EGS In Employment Policy

A basic objective of economic & social policy is to ensure that all able bodied citizens are provided a job at the prevailing market wage for unskilled work. Faster economic growth and employment generation will in a decade or so eliminate underemployment and disguised unemployment. Labour market reforms are essential for generating higher productivity organised sector jobs at a faster rate. An Employment Guarantee Scheme can play an important role as part of an overall reform of labour policy and government expenditure on poverty alleviation & rural development.
Because of our rigid labour laws, the employment elasticity of registered manufacturing (8% of labour force) has declined. Many new industrial facilities are designed to minimise use of labour and exporters prefer to set up labour intensive export facilities in competitor countries. The ID&R Act and its procedures need to be reformed to make it possible to remove corrupt, disruptive or lazy employees (* for details). The scope and reach of the IDA, which was arbitrarily extended during the emergency should be restored to its pre-emergency state. Chapter IX A, intended to promote voluntary consultation when trade unions in their infancy has become a virtual veto should be deleted.
One of the keys to the generation of high quality internationally competitive jobs is specialisation (including in services). The Contract Labour Regulation and Abolition Act was intended to regulate contract labour. Section 10 that came to be interpreted by courts to mean mandatory abolition must be modified to allow outsourcing of all services so as to encourage firms to specialise in, train labour for and improve productivity in each activity.
A comprehensive system of private pension/provident fund, centred on the individual will improve labour mobility. The system must be portable with benefits moving with the individual as (s)he changes jobs or organisations. It would be fully funded, with any employer contribution deposited into the individual retirement account. It must have modern and flexible investment regulations, which allow the build-up of a broad portfolio including higher risk-return assets like equity and private debt. It must ensure application of efficient governance structures and management so that the worker has access to the same returns that are traditionally available only to the wealthy.
Health insurance should be opened to greater competition by allowing 100% FDI in this sub-sector, it should also be integrated into the system in such a way that employees who move to another job continue to enjoy benefits during the search period and can carry any unused benefits to the new job.
The poor cannot afford to be unemployed while the better of spend a lot of (out of work) time searching for jobs. A web-based national electronic labour market should be set up by modernising and upgrading the national unemployment register. The system should generate and display an inventory of skills, from both the demand and supply side. The National Renewal Fund should be strengthened to assist in re-training and relocation of employees to increase the mobility of labour.
A unified labour code would be useful for unorganised workers if it deals with work conditions such as age of entry, hours of work, health, safety & welfare at the work place (maternity benefits, compensation for injuries & health insurance). In contrast a law that controls hiring & firing or sets minimum wage above market rate would merely open further avenues for harassment & corruption. Employers of unorganised workers should get a tax deduction for pension & health insurance contribution for workers.
Over the last few decades there has been a proliferation of poverty alleviation and employment generation schemes. Each has its own administrative infrastructure and works relatively independently. These schemes are commonly believed to deliver only a fraction of total expenditure (15%?) as benefits to the intended beneficiaries. There are also numerous schemes for building local infrastructure. An Employment Guarantee scheme (EGS) would be ideal if all these other schemes are eliminated and the funds allocated to a National EGS. By integrating infrastructure building, including watershed development and water harvesting, at the Panchayat and block level, in the EGS, effectiveness could be greatly increased. The scheme must be counter-cyclical in terms of district/region wise seasonal demand for unskilled labour. Wages paid should be based on average off-season market wages, which would be designated as the minimum wage for that district/regions EGS. It should incorporate a transparency clause, which requires supply of information on people hired, time spent and wages paid.
Information access is critical to increasing the value that reaches the poor. The Official Secrets Act virtually prohibits civil servants from giving any information to the public, by providing a stringent penalty for ‘unauthorised’ disclosure. It should be replaced by a Right to Information Act that carefully delimits the areas (e.g. foreign affairs, defence plans, strategic R&D, personal files) to which secrecy needs to apply. It would be designed to give the public the right to information about decision & actions that affect their lives. This must include every item of expenditure (small or large) made in the name of the poor, the weaker sections, scheduled castes and tribes. It must also include the various permits, licenses and permissions given to the public at the municipal and block or district level, so that they are available for public inspection.
Stable, high productivity semi-skilled jobs can be generated at a much faster rate if labour laws & rules are made more flexible. Faster economic growth and employment generation will in a decade or so eliminate underemployment and disguised unemployment. In the meanwhile, we need a simple well-focused government program, which is financially sustainable. The employment guarantee scheme can play a critical role if it integrates and replaces the plethora of rural development and poverty alleviation schemes. Even the most extravagant EGS cannot, however, be a panacea for all the ills of the poor. If it is just another add-on to the numerous schemes introduced over the past 25 years, its success is unlikely to be significantly greater than that of previous schemes.

Black Money: Reduce Creation

There are three major sources of Black money creation. Government controls, government expenditures and taxes. The government control and licensing system was taken to its peak during the seventies and resulted in the infamous License-Permit-Quota Raj (LPQ Raj). A gradual process of de-control started in the eighties, with a major spurt taking place in the early nineties. Since then it has continued at a modest pace. Those who operate at a very general level believe that the LPG Raj has largely been dismantled and is no longer hindering growth. Detailed study and/or experience of any sub-sector, however, reveals that this process is far from complete. The control mentality has pervaded every sector of the economy and every control is viewed by the majority of enforcers either as an opportunity to generate funds for themselves or as an imposition on their normal relaxed schedule. As there is little incentive, the minority of honest bureaucrats have by and large given up the struggle. Worse every law gives rise to rules and procedures that are first exploited to make money rather than to fulfil the basic objective of the law. The bottom line is therefore that a considerable amount of black money continues to be generated despite liberalisation. A determined and systematic effort at weeding out controls is needed in every sector if the generation of black money is to be reduced drastically and we are to accelerate growth.
The second and perhaps most important source of black money generation is the government expenditure system. Two decades ago one used to hear about commissions of the order of 15% on such expenditure. These commissions have apparently increased over time to the 30% range (plus/minus 15% where the opportunity is more/less). Higher siphoning off is possible in remoter areas where the objective is intangible (eg employment generation) and does not specify a concrete output. It is somewhat more difficult in Urban areas where specific projects are being carried out (e.g construction of a hospital or college building) and where relatively alert citizens and media can expose gross non-performance. The right to Information Act can be an important tool in the hands of citizens for increasing the accountability of the public expenditure system and reducing. The act must focus sharply on complete and comprehensive information about expenditures carried out(justified) in the name of the people/poor instead of getting distracted by controversial issues of national security, defence, foreign affairs and personnel files.
The third source of black money generation is tax evasion and corruption in the tax bureaucracy. As somebody once said, “There are only two things that are certain in Life, Death and Taxes.” Taxes are going to be with us for ever and over time as incomes increase more and more people will have to directly pay taxes. Simplification and rate reduction with a view to increasing voluntary compliance, has been the mantra of Indian tax reform since 1991. Though anti-reform moves have sometimes been sought to be palmed of as reforms and will perhaps be done again, the basic philosophy and direction of tax reform is now widely accepted across the political spectrum. Revenue increases through base broadening is the preferred means of increasing tax revenue.
What role does a tax amnesty have in this context. In 1997 when we recommended a sharp reduction in the marginal income tax rate, we also reviewed the experience with amnesties. There was only one research paper on India, that had tried to directly estimate the effect of an amnesty on tax collection. This paper showed that though tax amnesties increased revenue in the amnesty year they had a negative effect on revenue collection overall (i.e in subsequent years). At that time a carefully formulated amnesty was nevertheless recommended on the argument that a drastic reduction in marginal rates would create a new situation, by permanently bringing people into the tax net through voluntary compliance. The amnesty would therefore provide these new entrants an opportunity to start on a clean slate. This argument would work in the opposite direction when average marginal rates have been creeping up because of the imposition of various surcharges. In our view therefore an amnesty would be an anti-reform measure rather than a reform one.
Despite reforms, black money generation has not necessarily declined because of the deterioration of governance (expenditure & taxes). This factor also needs to be addressed if we are to make a major dent in this problem.