Thursday, January 20, 2005

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

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.
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


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