Saturday, February 25, 2006

Evolution of World Economy and Global Power: From Unipolar to Tripolar World

I have been investigating the economic basis power, with the focus on nation-states, not regional groupings, though in the many talks I have given the issue of EU always comes up. If we have a chance I will say something about that. We start with the basic economics of comparison, which is the size of an economy measured by the GDP at purchasing power parity, and then we go on to look at the two simple components, arithmetic components of this, which is population and per capita income. Then we go on to look at and to show how this is changing with globalization and policy reform, That is, we analyse the relationship between globalization policy reform and growth (very briefly). We need to do this because we have to forecast these and on the basis of the forecast we present a Mean scenario which one has constructed and to draw out its implications. Before I do that, however, I also give what I call the Conventional Wisdom (CW), I always liked this word which has coined by Newsweek many years ago. Conventional Wisdom, which I will show you is I understand still the widely prevalent, with maybe 90-95% of analysts still believing it. So, the scenario which I am going to give you and the implications are in some sense unconventional and you have to take with your own pinch of salt. These are my scenarios and you can decide whether you believe them or not. Most of the world I think still doesn't believe it. So, the implication which I draw from this mean scenario is two-fold: One, that the world economy is multi-polar, and will remain so, and two, that global power will go from being uni-polar to tri-polar. These are two of my conclusions, as I said I don't think too many people in the world still accept them.
Okay, we start by looking at a very simple thing, which is the share of world GDP at purchasing power parity of about 20 countries (Figure 1). I looked at the 25 largest countries in the world and here I show them ordered from the largest to the smallest. Not much of a surprise but I think it's useful to note that the largest country is the USA and the second largest, China is about half the size of the US economy at present and then Japan is a little more than half that of China. And then you get India and Japan next with around a quarter of the US economy. Then come the other rich countries, Germany, France, UK, Italy, etc.
Now, the GDP in very simple arithmetic terms is the multiplication of the population with the per capita income. So, we have looked at the world GDP and then we go on to look at the two components of GDP and finally we'll draw some implications. So, on to the world population shares (Figure 2). Now, here of course as most of you are generally aware the picture is quite different. The two countries with the largest shares of world population, are China and India, each about 20% of World population. The USA in this case is one-fifth the size of the largest country. That's one important point. The second point is that on the right of the USA is a country which is often missed, Indonesia, which is actually the fourth-largest in the world. Next come Brazil and Russia, which have been mentioned a lot and this is one of the reasons why they are mentioned a lot, because they come next (5th and 6th). But Indonesia, which is more populous, has been missed in many of these discussions, and it's going to be important. This may not however happen in the next 25 years, but later. So that's one of the reasons why it's not been focussed on actively. Further to the right you see mostly the rich countries and then it's a sharp drop off, very-very small proportions to the right.
Figure 3 shows us the second component of GDP, the per capita GDP of the country. The same set of countries that we have seen in the earlier figures are presented here, but they are now ordered by the per capita income at PPP. So, again, on the left we have the USA the richest country form among the set of large countries. Each country’s per capita GDP is shown as a ratio to the US, from now on most of the things you'll see will be as a ratio to the US, and I will explain why, later. You see here, the US is 100% while most of the rich countries are 80% of the per capita income, starting from Canada, Netherlands, Australia, Germany, etc. are about 80% of the per capita income of the US. And then if you move to the extreme right, you have India with only 8%, Indonesia with 9% and China with 13%, of the per capita income of the US. Now, this has two implications. One is of course, the obvious one which everybody knows about, that we are a relatively poor country, among the large countries, we are the poorest actually. But the other side of this coin is the potential for catch-up, which is where the future projections comes in and that's where we are going from here. But let me point out again, that Indonesia is second from the right here. It also has this huge potential. I repeat again the same thing, a country which has been missed in much of the discussion on the global plane, whereas Russia and Brazil, you all probably heard of the BRICS study, a lot has been made of that. China of course, is there with still a lot of catch up potential, next only to India among this set of countries.
Now, in the next two graphs, what I do is, I put country’s share of GDP and population either side by side or subtracting one from the other. The first graph here (figure 4) puts together the world of GDP and the world share of population; these are the red and the pink graphs, for each country. Again, the same set of countries. Now, I want you to focus in the middle here, for a minute, you see Brazil and Russia the shares of world population and world GDP are almost identical, there is not much of a gap. And this is what leads into one of my conclusions which will follow, that in the case of these two countries there is not much of a gap to be changed. On the left of course, you see, both positive, the US with the large very large positive gap and China, India with very large negative gaps. That comes out very clearly in figure 5, the next graph, where I take the countries with the largest gaps - both positive and negative and put them on this graph here. So, the rich countries - USA, Japan, Germany, France, UK, and Italy, are the countries with the largest positive gaps between the GDP share, world GDP share and the world population share and three countries on the right of figure 5, with the largest negative gaps are India, China, and Indonesia. So India has the largest gap, China, the second-largest, Indonesia is the third-largest. And one of the theses of my talk and the papers I've written over the last 18 months is that these gaps are going to narrow over this century. Much of this is going to happen over the next 50 years and I will explain why. The question you can ask is, why it will happen now? Well, these gaps have actually existed since the Industrial Revolution; they actually opened up during the Industrial Revolution in the 17th century and they have existed for centuries. So, it's not obvious that these gaps would close, and the reason why I assert that they will, is kind of shown in Table 1. The reason is the past and projected growth of per capita GDP (in PPP). Everybody is aware that China has been the fastest growing economy in the world, and India here is in 9th position/rank. Lot of people are beginning to be aware of this, but perhaps many are still not. These are real growth rates.
We can go into the issue of PPP and Market exchange rate based GDP, it turns out to be a very interesting issue, which I will perhaps take up later, when I give you the Conventional Wisdom. It turns out that all real growth rates are the same as per the World Bank World Development Indicators. That's something which other studies do not seem to be aware of, which creates certain problems in projections which these studies seem to be totally ignorant of; but I will mention that when I show you the projections, what I call the Conventional Wisdom.
So, the reason that we expect the gaps to be eliminated is because over the last 25 years, the countries that have the largest negative gaps (figure 5) from among the set of large countries are the ones that have been among the fastest growing countries in the World. Table 1 shows the average growth rate over the last 25 years not over the last 10 years, not 15, but 25 year average. China at 1st place, India at 9th place, and Indonesia in the 11th place here. So, that's an important thesis of the papers which I have written over the last two years, which, as I said, I'll be summarising here, is that these gaps are going to close over the next 50 years. Indonesia I'll leave out from here on because it's going to be a slow process because of the Asian crisis and the political developments that followed it, so it will not have a big impact on the global economy over the next 15-20 years, so we won't discuss that much but I want to say that from diplomacy perspective it's an important country for India.
Okay, so this is the current picture as I gave you, in the five figures and one table, the GDP shares, population shares, and the gaps, and how they have been closing. Now we go into the future projection which was the primary purpose of my analysis when I started it. So we will now reverse the process, we'll start by looking at the population projections, then look at the per capita income projections and finally put them together into the GDP projection. We will then conclude by tracing out what that implies for the global economy.
Figure 6 shows the share of world population as projected by the UN. I have not changed it, massaged it, I've just taken the projections from the UN, and used them. Now, what is interesting about this, firstly, the orange bar there is India and green is China, so the first thing you notice is that the relative population share is going to invert over the next 50 years. The inversion point is somewhere around 2035. There is a slightly revised projection which has come out since I made these original projections but that doesn't matter, it doesn't change it substantively, actually it just brings the transition point where India's population goes above China a little earlier, which is now around 2030 but that does not matter. So, basically, the way to look at it is that India's and China's population will be around the same over the next 50 years. The second thing to note is the third bar which is this purplish one is the US. The US share of world population remains almost the same. You can see that it remains just below the 5% line in all three periods shown (2020, 2025, 2050).
The third, much more important point, that has recently started appearing in reports, is if you look at either Japan which is the light blue bar, or Russia, which is the slightly darkish green bar. The blue and green, you can see them they're more or less together there, and you go forward and see the dramatic change in the share of the population of Japan and Russia. Each shows a decline of about 25%. This is a very important factor when we discuss Russia, the future of Russia; this is going to have big impact on Russia's position in the world in future. And then there are the rich countries. Most of the European countries, Germany and others, will also have declining shares of world population. Recall that the US GDP was the largest, even though its population was and is the third-largest. Now, the important takeaway from here is that if you look at it from the population perspective and if you put the catch up story with the population, China and India, have to have a per capita income that is only one-fifth of that of the USA because their population is about five times that of the US, they only have to have one-fifth the per capita income of the US to equal it in size. Okay, so, that is the first important point that emerges, that China and India have the capability of equal in the US economy in size, because they only need to catch up to one-fifth of US per capita income. The second point which appears from this population perspective is, that really there is no other country which can equal the US without exceeding its per capita income, just a simple obvious point but important to note because, leaving aside Indonesia for the moment that is the bar to the right of the USA, the other countries are just too small. The per capita income would have to be far in excess of the US to equal the US economy in size.
Okay, so, that is one thing which emerges clearly from this population perspective, going into the future, let me summarise. In my view, what this shows you is, that only tri=polarity is possible in terms of nation-states; remember, I am talking about nation-states only which is what we have been looking at. The scope of catch up, India is currently a low income country, so there is a big scope and that is going to happen, China is currently a lower middle income country so the scope is slightly less, but it will also catch up. Consequently the key issue is going to be the trends in growth of per capita GDP in these two countries, over the next 25-50 years or whatever time horizon we are interested in. Among the issues which arise are how quickly will China slow down and can India maintain his growth rate. Now within my 20 minutes, I think I have already used up 15, I am not going to be able to go into the details, but perhaps we can discuss that if somebody is interested in question and answers and finally, you know when I first gave this talk, a lot of people from the EU were very offended, at my leaving out the EU. In principle, if EU become what I call a “virtual state” if it acts in external relationships as the single country then it would be a fourth pole but having said that, and we can discuss that later, I will stick with the nation-states.
Okay, so, population projections I have given, and table 2 presents my own per capita GDP growth projections. A number of people ask me the basis for these projections, you know this is a number, it's a summary of all the forces driving growth in economy. I have done these projections from a macro-economic perspective, based on my studies of the growth experience of India, China and Asia. But you know, people talk about energy, and other sector and micro factors. in some sense, I am summarizing all those factors into this growth rates. We can of course discuss each of those individual factors if one wants to discuss. Now, two or three points here, because I think I have to speedup a bit here, firstly in my projections, China and India are the two fastest growing and Russia the third fastest. One interesting thing to observe here is, if you look at the third column of these projections, India's growth rate will go above China some time in the middle of the next decade and therefore, you see in the third column that represents the period 2016 to 2025 India will be growing faster than China, according to my projections. As I said, these are based on a whole bunch of analysis of the Indian economy and a smaller but equally detailed analysis of the Chinese economy, on which of course, different experts may have different views, you know, this is one scenario.
Russia will be third fastest growing economy among the set of large countries, but its position doesn't change all that significantly; for the reasons I have already told you relating to population. Brazil here is at the bottom and Mr. Bery is a Brazil expert and I am sure he'll talk about it, but I did. Do some modified simulation, given his earlier comments which he made, if we double this growth rates, it doesn't significantly change the global picture, even though Brazilian economy becomes larger than a 2-3 other countries in 2050. Now using these same growth rates, it turns out if you look at the real growth rates, however you look at them, you look at them in as it's called local currency units, you look at them in PPP terms, or in terms of some kind of a real GDP at current exchange rates, they are all the same. I should mention, all this data I've been showing you, all the past, actual data are from the world development indicator of the World Bank and the projections are based on this data. So, it's all standard data, I don't try to adjust any country’s data to correct for it. And therefore, even the China data has not been adjusted for the widely accepted problem of overestimation.
Figure 7 depicts what I would say, was the 100% Conventional Wisdom among informed people, including analysts who had even done their own projections. You know, there are some sophisticated analysts in the US, there is also as you are aware the CIA. This is the kind of picture which I believe that they had in 2004 and probably 95% of the analysts in the US and those who think about it in UK and Europe, still have this kind of picture of the future, while mine is very different. Now, what I've done here, and this relates to Mr. Bery’s point, is that I've applied the growth rate projections given in table 2, to the GDP expressed in US dollars using the current exchange rate to convert from local currency units to US dollars. This is done just so that you know what I've done here, and what is the picture which comes from this conventional wisdom (which in my view is fallacious) What I believe is the correct measure for comparing size or economic power, is to use the GDP at PPP, which we will show below. The main elements of this convention view are, one that China (the pink line in figure 7), will continue rising but even 25 years from now, it would only be 30% of the size of the US economy. That's one critical difference from my own conclusions, which you'll see later when I give you the PPP projections. Remember now, all these measures which I am going to give you now, are going to be relative to the US, because power is always relative. There's no such thing as absolute power. It's power relative to somebody else, whether you are talking of economic power or other powers which I' the end if I have a little time, I'll talk about.
So, the first thing to note is that among the US analysts China was clearly recognised as the rising power, but it was thought that it would be no threat to the US as it would just be 30% of the US, 25 years later. Second, the bottom line here, the green line, is India. So, conventional wisdom about India, was of a small country, 5% of the size of the USA. The countries in the middle are the well known rich countries UK, France, Germany etc. which would more likely be competitively challenged by a rising China, but not really the super-power. India at the bottom, not really a significant player, but maybe, at the end of these 25 years, with about 15% of the GDP of the US, it would be kind of ‘swing state’. The last is a word I actually heard in 2004, in Vienna from a very respected US analyst who I believe also has done work for the CIA. So that was the picture in 2004.
Now, what is the projection which I have? Figure 8 is my projection which use the same growth rates from table 2, exactly the same growth rates but now applied to GDP at purchasing power parity (PPP), and again shown relative to the US. So, US is also growing but here it's shown as 100, that middle blue line is the US, because we want to see the relative size of the economies. Now, there are just two things which stand out, one the size of the Chinese economy becomes larger than that of the USA within about 10 years i.e. 2015 and by the middle of the century it's going to be twice the size of the US economy. That is something I believe nobody had perceived. I am asserting this though I could also be wrong, I mean as I said, you have to make your judgement. But this is the first time, in my December 2004 paper and again in the March 2005 paper, that I brought this out. The second point that emerges, the orange line is India, according to this projection, is that India's GDP would be around the size of the US by 2035, that is in about 30 years' time.
And finally, for those of you who are interested in Russia, these are the crosses at the bottom. According to this projection which was made before this recent oil price increases, they would just kind of catch up with Japan in about 50 years. And always remember the population has lot to do with it; they are shown in my projections as the third-fastest growing economy. So it's not that I am saying they won't grow faster. The oil price changes and the natural resource price changes can change this a bit; The crossover point may be a bit earlier, 5-10 years at most. But it doesn't change fundamentally this big picture.
That was the economy and I move on to the power of nation-States. I have developed what I call an index of power potential (VIP2),

Virmani Index of Power Potential: VIP2 = (Y/Yus) * (y/yus)a
Y =GDP at PPP, y = Per capita GDP at PPP, a = technology weight = 0.5

I don't think I'll go into the details because I don't have the time. So, the basic feature of this is, that it adds a technology factor to the basic size, which I show can be estimated by the per capita income of the country. This is an index of power which is the multiple of the GDP which are those Ys over there at the bottom, the big Ys, and the small ys to the power of a, so this is a factor which comes from technology. Again, I think given the time, we can discuss it later, but if you look at this picture, now we are getting into the evolution of what I call power potential. So, I use the economic arguments to define an index of power potential, which is this VIP squared.
The picture that emerges is shown in figures 9 and 10. Figure 9 is scaled to bring out clearly what is the position of India as per this Mean forecast. That is the pink line. What it shows you is, that the power potential of India will equal that of Japan, which is that blue line on top, in about 16-17 years from now. The same growth projection used earlier (table 2) is used in this power projection index. Figure 10 brings out clearly the bigger picture. Overall and this is more important, according to this forecast, China's power potential will equal that of the USA by 2030, and this is a major contrast to the conventional view presented earlier and in my view, was kind of major shock to many people in the USA, even though we have had people in the US, the neocons, etc. talking about China. The implication of this scenario for the USA is that China is going to be a major threat to their power in Asia in the not too distant future. I believe, this is the first time anyone had made such a projection. As I said earlier, you have to judge weather its right or wrong, but according to me, this was the first time that this kind of scenario had been built.
The second point that emerges very clearly fro both figures is that India in this forecast in my view would become a great power before the middle of the century. That is the second line. Finally I have just put India relative to China in figure 11, just to get a picture, and you see that both these the pink one is just the size, the GDP which I mentioned earlier and orange one is the power potential, based on that index. You can see that this follows straight from the growth projection which I mentioned that India's size and power relative to China would keep declining till around the middle of the next decade, and then would start to catch up. But even 50 years from now, India would, according to these projections, be only 70% of that of China, so it's a long haul.
I have also after this gone on to develop an index of ‘actual power’. The starting point remains the size of the economy, from which the power potential based on the economics is derived as shown above. Then we bring in strategic factors, you know, defence technology, nuclear technology, etc. I will just leave it, and come to the conclusions.
Basically, the conclusions from the Mean scenario and the current situation is that, we have a multi polar world economy, that is in purely economic terms when we are talking just economics and not power. I think EU does constitute an economic force; there is a belief among the supporters of EU is that 70% of the economic decisions of the EU are now with the EU Secretariat what you say and not with the nations which cost with the EU. If that is correct then at least as for as economics is concerned, you can consider the EU as a single power and there for a pole of the world economy. So I will go along with these experts because they get very offended when you question them, So, economic multi polarity already exists and will be strengthened by the rise of India. So, India is right now just entering into the economic game and over the next 25 years, it would become a significant pole in the world economy.
But as far as the power structure is concerned, in my view, in my conclusion, the world is clearly uni-polar and in fact has been for far longer than most people imagine. In the last paper which I did before leaving ICRIER, Working Paper 175, where I showed, I applied the VIP index backwards in history, till the 18th century or 17th century and what come out from there is that Russia lost its power, I believe even before it collapsed in 1990. So I believe that in some sense inherently, the world had become unipolar even before what people generally think. So, the world as I describe it now is uni-polar world with a multi polar fringe by anology with the concept of monopoly with a competitive fringe (in economics). In the World we have the middle powers competing against each other but no match for the USA in terms of the concepts of power that have been used here. These concepts do not incorporate aspects connected to non-state actors, which may be relevant.
And therefore, by around 2025, the world will, in terms of power structures, become bipolar with the rise of China, and somewhere between 2035 and 2040 it will become tri polar. Now, please, you must remember, because some people.very easily confuse the actual present with a forecast future, one has to be very careful in remembering and distinguishing between the position today and the forecast. It is very important not to confuse the two. It is essential ones feet are firmly placed on the ground and are grounded in the present but ones head has to be up in the sky if one wants to achieve anything. But it is extremely unproductive, perhaps even dangerous, if your whole body is lifted into the clouds along with your head. This can give you very misleading answers to what you should or should not be doing currently and I am saying this because I often read in the press, articles by various analysts repeatedly confusing between where we are today and where we might be 25 years from now. We have to be aware of both when planning current approaches and actions. Thank you.

An essential element of power is the “will to power”. A country has to have the will; there is absolutely no doubt about it and the two countries which stand out, that are at opposite poles over the last 30 years or so are Japan and Russia. Japan, consciously for many reasons, decided to play a secondary role. In fact over the last 30 years, Japan could have been a major global power but for various reasons choose not to.
On the other hand Russia as indicated by its economic size and strength is not very strong now and was not even at the peak of itsr power. The last paper I did showed that in the peak of its power, the USSR had 40% of the power potential of the USA. Russia by itself had even less. If you treat the USSR as what I call a ‘virtual state’ because Eastern Europe could be said to have been the colonies of Russia because basically they were part of the Russian/USSR system they had 40% of the power potential of the US. Yet they were able to convince the world they were equal in power and lot of that has to do with the strategic and military assets, which we really didn't talk about.
As far as growth is concerned, you know, it's not a question of tripolar it's a question of the growth: Education, skills, etc., go into the production of growth, so, there is a whole different topic, what is it that India needs to do to grow and just to very briefly answer, education is clearly one of them, that in fact in a separate paper, I identified seven policies which are critical to India's future growth and one of them is education policy reform.
Table 1: Real Per Capita GDP Growth – 1980 to 2003
Figures 1 to figure 11

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