Wednesday, December 6, 2006

Future Economic Contours of Asia and its Impact on Global Strategic Architecture


It is a pleasure to be here at the USI. I was eagerly looking forward to it. The focus of the talk today is on the role of Asia in the world economy. To see where we are going, we first look backwards a little into history and speak about things which are not normally talked about and then move forward into a projection of the future. With the help of tables and figures we will deliniate Asia’s role in the world economy in the past century and in the recent decades.
We will then digress briefly to cover some definitions. Though one would like to avoid any economic jargon at such a gathering, these are necessary for distinguishing between a lot of contradictory numbers that are put out by different writers and the media. For instance, some of you may have heard the following type of statements; India’s share of world GDP at Purchasing Power Parity (PPP) was 5.9 per cent in 2003; India is ranked as the eighth economic power and fourth in relative size and so on.
Then I will very briefly describe indicators and indices of power. Finally, I will go into the likely projections for the future of Asia and the world. We will look at India and China, ASEAN and very briefly at the European countries and Russia. We still have to take note of the relative developments in Europe and Asia and then briefly their implications. Other issues of interest can be covered during the question and answer session. The basic approach underlying this presentation is to link economics with security issues.
Regional Shares of World GDP (PPP)
Table 1 shows regional shares of world GDP over the long period of history from the beginning at year 0 to 1998. Table 2 depicts regional shares of world population and Table 3 shows per capita GDP ratio to the world average. You will be surprised that all this data exists all the way back to the beginning of the millennium. The degree of accuracy that far back will obviously will not be as much as in recent data. You would notice from the tables that the second World War provides, very roughly an appropriate divide from the perspective of directional trends. During the pre-war period Asia’s economy has been more or less in continuous decline with its share of World GDP on a downtrend. Conversely Europe’s share of World GDP has been rising. In the millennial perspective, America was a late comer till its settlement by Europeans, and then in 1820 it took off. So basically before WW II there was a decline of Asia in the world economy. The tables reflect relative importance of regions in the world. Notice here that up to 1820 Asia had 60 per cent of the world economy with Europe around 25 to 30 per cent.
A small part of the relative decline of Asia and the rise of Europe and USA was due to differences in population growth, which resulted in a decline in the population share of Asia and a rise in that of Europe and USA (table 2). Most of the change in relative economic position was however due to the dramatic rise in the per capita GDP (or income) of Europe and USA as a consequence of the industrial revolution and the diffusion of technologies spawned by it (table 3).
In the post-war period, we see a reversal of the pre-war trends for Asia and the USA with the share of the former beginning to rise and that of the latter starting to fall (table 1). This was actually preceded by a turn around of Europe with its share of GDP starting to rise at the beginning of the First World War. This reversal was driven initially by a reversal in the population shares of each of these continents. As we will see below it is now increasingly driven by the closing of the per capita income (or GDP) gap that had opened up and widened over the previous centuries.
Though the overall story is going to hinge on three continents, Asia, Europe and the USA, it is useful to look briefly at Latin America and Africa as well. Table 1 contains data pertaining to ‘Share of World GDP at PPP’, the “Share of World Population’ and ‘Per Capita GDP Ratio’. Note that the share of Latin America in world GDP is 8.7 per cent and in world population is 8.6 per cent. There is very little imbalance between these two. Consequently their per capita GDP is also about equal to the World average. We don’t except big changes in future in Latin America because there is no imbalance. On the other hand, Africa’s per capita GDP is very low relative to the world average. We don’t however, except large changes in Africa over the next 50 years. So this presentation will not be saying much more about Latin America or Africa.
Comparing Economic Size
It is important to understand why we see in public discourse, different estimates of relative income or GDP of various countries. What has been used in this presentation and which will continue to be used, because it is the right and proper way to measure relative size of economy of different countries or regions, is GDP measured at purchasing power parity (PPP). As already mentioned, GDP can be divided into population and per capita income or the average income of persons living in the country. The latter is correctly measured only if use PPP.
In simple terms purchasing power parity can be explained by assuming that somebody having $100 in the US buys a certain basket of goods and services. To have parity there is a need to ascertain as to what is the amount of rupees that will buy the same basket of goods and services. Let us say just for the sake of an example that its equivalent is rupees 1200. Then that is the purchasing power parity 100 dollars to 1200 rupees. It means the exchange rate in terms of purchasing power is 12 rupees per dollar and not 45 rupees as we see in the market. The purchasing power parity is really a measure of the size of what people (in India in this case) can buy which is what the GDP is supposed to be.
In contrast the GDP measured in dollars is merely the Indian GDP in rupees converted to dollars by multiplying with the current exchange rate (Rs45/US$ in our example). In certain cases this grossly under-estimates the true purchasing power of the economy or its residents. This can be seen from Table 4.
Very briefly, what has been done here is to arrange all the countries of the world in the year 2005 along the X-axes. To avoid cluttering I have not written names of the countries. Then their GDP at PPP and at the 2005 exchange rate is plotted. Red dots denote the GDP at purchasing power parity and the blue dots denote the GDP measured in terms of the current exchange rate. A trend line has then been put through each set of dots – red line for the GDP at PPP and a blue line for GDP at the market exchange rate. The important thing here is that when you go from almost zero income to about middle income or 24 per cent of the US income, the gap between these two widens. That means the current exchange rate measurement is getting further and further away from the real measure of the economy, the GDP at PPP. Once a country has 25% of US GDP the gap starts to narrow.
Now most people have heard about the first BRICS (Brazil, Russia, India and China) report. This report assumed that we are on the side of the curve where the gap is going to narrow. It is just not true of India and China. Russia, however, is now at the turning point and hereafter the gap is going to start narrowing as Russia grows. Brazil is somewhere in the middle between China and Russia. So there is the fundamental error in the way many reports have projected GDP at market exchange rates and then used conversion factors to obtain the GDP at PPP.
Country Trends: Asia and Europe
Now we come back to the PPP measures which we use right through out the rest of the presentation. Table 5 depicts the large Asian countries’ share of world GDP. This shows that the GDP shares of India (blue), China (red), Japan (orange) and rest of Asia (purple) all declined in line with the overall downtrend shown in Table 1 from year 0 to 1998. There are three additional points emerging here. One is that during the period 0 to 1500, India’s GDP was larger than China’s. Since then it has generally been smaller. The second is that Japan had a relatively small GDP share till the end of the War, but thereafter it rose rapidly and overtook both India and China. Finally, the up tick in the overall share of Asia was led by Japan, followed by the rest of Asia, then China and finally India. In other words all countries of Asia are participating in the come-back of Asia.
Details of Asian countries’ share of world is shown in Table 2. This suggests that the decline and rise of the population share of Rest of Asia has played a role in the decline and recovery of its GDP share. Japan’s modest rise and fall in the prewar period was also related to population shares, but the post war rise has been driven by increase in per capita income (catch-up growth). During the pre-war period, India’s population share was on a declining trend while China’s was highly erratic. In both cases, however, the predominant driver of the decline in GDP share was the rising gap between their per capita income (or GDP) and that of USA, Europe and some Latin American countries(table 2).

Let us briefly look at the European countries’ share in world GDP (Table 6). Till the first war, the share of all European powers was rising. There was a fairly short period in history when the UK was the largest economy. Earlier it was Italy, France and so on. We need not go into details but what the table shows is that by and large all the major countries rose till about the war period and then started declining. Data pertaining to the European Countries’ share of the World is contained in Table 3.

We turn next to the contemporary period and shift from historical data to the standard World Bank data. Table 7 depicts the changing pattern of global economy in terms of share of country’s share of World GDP at PPP. North America (the US and Canada), as a region has a share of world GDP which has been more or less constant except for a small decline from the 1970s onwards. The share of Asia-Pacific has been rising rapidly for the last 25 years or so. Europe and Central Asia as a region have been declining. So the picture here currently depicts the US share at par and the relative rise of Asia and relative decline of Europe.
Table 4, compares the position in 2003 with that in 1979 for GDP shares, population shares and relative per capita income. The relative per capita GDP of Asia has risen over this period because of the because of the rise in China and India; India’s per capita GDP relative to the world has doubled from 0.2 per cent of the world average to 0.4 per cent . China’s per capita income was much smaller in 1979, about half that of India. It has jumped six times to 0.6 of World average and is now 50% more than India’s.

World Today: Economy and Power
There has been a lot of discussion that the world is uni-polar, multi-polar or poly-centric. To get a fix on this issue let us start with a look at the World economy. On the basis of the shares of different countries and unified economic groupings we conclude that the World economy is multi-polar. Table 8 depicts the economic power of major countries relative to the US. Considering that the US is the largest economy in the World we measure each country’s GDP relative to the USA. We take the European Monetary Union (EMU), along with the UK (which is not in the EMU, but is an important member of the European Union) as a measure of an almost unified Economic Union. At this time the size of the EU economy is almost 102 per cent of the USA. The size of China’s economy is 70 per cent of the US economy. Next in size we have the Japanese and the Indian economies which are roughly 30 per cent of the USA (table 8). So there are multiple sources of economic influence even though they are not equal to the US. We believe, that it is not necessary for all economies to be of equal size to have a significant impact on the World economy and to have a role in the world. Historically the Italians, the French, the UK etc have been powerful nations despite wide variations in different parameters. Roughly 30 per cent is a good measure. With this criteria we have five large economies and consequently can conclude that the world economy is multi-polar.
As defined by Waltz State power is the “extent that (one) effects others more than they affect [one]” It is therefore a “combination of its capacity to resist the unwelcome influence of others and conversely to influence others to behave as it wants them to.” Power of a State or country has therefore to be measured relative to another country, and in the contemporary context it is most appropriate to measure it relative to the USA. In our analysis we consider only the power relations between States (countries). That is we do not address the issue of non-State actors.
Economic power depends not just on the size of the economy but also on its technical capabilities. In our academic work, we have applied economic concepts to measure technological capability and economic power. In very simple terms this involves the definition of a technology-skill factor based on the economic theory of production. This is combined with measures of relative economic size, that we have already used above, to define an index of economic power or the over ‘power potential.’ derived in relation to the US.
Part of the attraction of this index is that it can be used to calculate the power potential of over 200 countries in the World and can be extended backwards into past centuries to calculate the relative power potential of all important countries of those eras. These calculations have been done and are available in the references. Here we use this index along with the relative size to identify the global and regional powers. Details for calculation of the Index of power potential (VIP2) are as follows:

A potential global power may be defined as one whose index of power potential (VIP2) is over 25 per cent. Only two countries meet the criterion for defining a potential global power - China and Japan The USA, by definition, has an index of 100% as other countries’ power is measured relative to it. We define a regional power as one that has an index value of 5% or more. There are five European countries, which have a fairly high value of the index and easily meet this criterion. There are only two Asian countries, India and South Korea, which can be classed as regional powers.
Other countries that can be called regional powers are Russia, Canada and Brazil. Details pertaining to global and regional powers are given in Table 5.
The Indian value of the index is 8.9 per cent. It is still less than the value of the index for most of the European regional powers. Russia’s power index at 6.4 per cent is less than that for India. Yet it appears to be more powerful. Its power does not arise from its economy, but its strategic capital or assets, something that we will touch upon below.
As there are so few countries in the list of regional powers and countries such as South Africa, which are commonly mentioned in this context are not in this list, we weaken the criterion. We define a category of global VIPs that have an index value of 2.5% or more and regional VIPs that have an index value of more than 1.5%. These countries may play a significant role either globally or regionally (table 6). South Africa is the only African country that makes it to this list while other Asian countries in the list are Turkey, Iran and Saudi Arabia. Taiwan, China, Indonesia, Thailand and Hong Kong, China are also on this list.
There is a slight problem with the VIP2 index because it treats natural resource riches on at the same level (or on par with) real technological power. This creates some anomaly.
Global Imbalances
We are now ready to start looking at the future of Asia and the World. Before doing that it is useful to look at one more table that summarizes the current global imbalance that we believe will be substantially corrected over the next half century. For each country we take the difference between the share of a country in world GDP and its share of world population. Then we select the countries with the greatest discrepancy or imbalance (positive or negative) and depict these in table 9. The important thing to note is that the three largest negative discrepancies are three large Asian countries. Those with positive imbalance are European countries along with Japan and the US.
Our thesis is that these imbalances are going to get reduced but not eliminated over the next 50 years or so. That is how rise of Asia is likely to come. Note that Japan is depicted as having a positive imbalance. As this is corrected it will slow the growth of Asia, but overall the effect will still be a rising Asia. A legitimate question can be asked, that for many centuries these imbalances have not been corrected, even though there have seen glimmering of change even earlier.

Table 7: Average GDP growth (1980 to 2004)

However, if we come to the more recent period table 7shows the average GDP growth over the last 25 years. When we look at the performance in terms of per capita GDP growth we find that with the exception of two European countries the fastest growing economies are all Asian. In terms of GDP growth, the two European countries are replaced by countries from other continents. The rapid growth of many Asian countries has resulted in a closing of the per capita income gap with the rest of the World. Note that India is ranked 9th in both cases. So what is happening is that with globalisation and policy reform the countries of Asia, which were earlier left behind, are beginning to catch up. We expect a number of Asian countries to continue to be among the fast growing economies in the World.

Population and Growth Projections
The basis of our projections of economic size and the power potential index projections, are the population projections of the UN and our own projections of per capita GDP (or income). The UN population projections are shown in table 10. There are two big spikes one pertaining to China (green) and other to India (red). The table shows that China’s population will grow more slowly than India’s over the next 50 years or so. Therefore the population of the two will become almost equal around 2030-35 and India’s will be marginally larger by 2050. Secondly, relative population of Japan, Russia and parts of Europe such as Germany is likely to decline. So population is going to play a role in the relative decline of Russia, Europe and Japan.
We have to digress somewhat to discuss why EU can be treated as an almost unified economy but not a single power. In economic matters it acts as a unified whole in several dimensions such as at the WTO negotiations. However, at the World bank, G8, G20 etc each country has a separate presence even when EU may co-ordinate certain aspects. In matters pertaining to national security such as the question of raising a small force in Europe, the issue is being debated endlessly. Thus the EU is not even a ‘Virtual State,’ like others virtual states in history like the British empire and the USSR. The British Empire, even though it contained a separate entity like India, was a virtual state in the sense that the empire acted as a unified whole in projecting power. The USSR consisted of Russia and countries of Eastern Europe and was a virtual state because it acted as a unified state. The EU is far from it and the prospects of it becoming one over the next 10 to 15 years are very low. Of course, if it becomes a ‘virtual state’ then it would be a power, but the prospects have become bleak after the rejection of the new constitution and the rise of nationalist sentiment in several countries.
So given this uncertainty about the EU, our conclusion is that the world can only become tri-polar. Why do I say that ? It is a very simple concept. For China and India to equal the US, they have to have a per capita income only ¼th of the US because their population is about four times. Though nothing is inevitable the likelihood of this happening over the next 20 years for China and the next 40 years for India is quite high. For any other country, such as Russia, Brazil Germany or Japan to equal them in terms of economic size or power they have to have a much higher per capita income than the USA and there is little prospect of that during the next 20 years or more.
Per Capita GDP growth projections are shown in Table 8. The only important thing to note here is the forecast that India will start growing faster than China sometimes in the next decade (2010-2019). To appreciate this we need to briefly outline how the Chinese economy functions. First, China’s objective is growth maximization. The basic objective of the Communist Party of China is to retain power and they have come to conclusion since 1980 or perhaps a little earlier that the best way to do that is to maximise the rate of growth of the economy. Some analysts have in the past confused this with the very different USSR system which collapsed. The Chinese system is a highly decentralised system, unlike the USSR. It was decentralised in Mao’s time long before China started moving to a market oriented system. The growth objective is very easy to translate to even public sector companies. Basically, at a firm level it becomes a corporate growth maximisation strategy. So the strategy prevails not only at the national level, but at the provincial, city and down to the public sector company levels.

Secondly, there are two ways in which they have sought to achieve fast grwoth. The first is public investment. A lot of people forget, that in 1980 China was a Communist country and 100 per cent of the assets of the country were owned by the Government/Communist Party. All the profits and returns to capital generated in the economy could be used by the party/State without the need for tax distortions. The system they have maintained is that all returns from public assets (which constitute a very large fraction) are re-invested. So there is a very high rate of investment. That is one prong of the strategy but this strategy alone would not have worked just as it did not work in the USSR. The second prong is the market. This is coupled with two engines of growth, FDI and exports. Exports by State linked entities enjoy virtually free run on the banks, while export oriented FDI and most other FDI enjoys a host of freedoms (including from labour rules) that is not available to domestic private parties. FDI is has been critical to China’s growth over the last 25 years because their entrepreneurship was decimated by the Communist party. Historians report that two million entrepreneurs were killed during the Communist Revolution. Therefore reforming China did not have any entrepreneurship base of the kind we have in India. Therefore, to have a productive growth they instituted and evolved the market led, FDI-Export led growth model. That is the basic reason for their success.
To project their growth into the future we need to know what are the weaknesses and risks pertaining to China. People who want to see China fail emphasise the weaknesses but one has to be realistic. I am of the opinion that strengths and weaknesses are the two sides of the same coin. First look at government ownership which enables high rate of investment in China. One of the failings is that it leads to creation of excess capacity which further results in falling returns and rising non-performing assets (NPAs). China analysts keep writing about the weakness of the banking sector. In reality it is a deliberate subsidy provided through the government owned banking system. It is therefore a disguised form of fiscal deficit. So they keep pumping money into unprofitable and/or failing public sector units. This is a systemic weakness, the other side of the coin of strong re-investment by profitable public sector companies. They will have to resolve this contradiction if they want to keep growing.
The second thing is that rising exports are critical to growth when the public sector has such high investment rates irrespective of expected returns on investment. The Chinese are already the second largest exporters in the world and there is a limit to the export share they can garner for themselves. If it keeps growing, eventually it would become 100% which is impossible. So at some point the high growth of exports that has sustain overall growth has to slow down. This overdependence on exports will soon turn into a weakness as export led growth cannot continue indefinitely. The third weakness is that the FDI-export model has a knife edge character. We learnt this during the 1997 ‘Asian crisis,’ when the high growth economies of ASEAN and East Asia suddenly slowed down considerably. Before the crises it looked as if high growth would go one for ever, then a sudden unexpected shock derailed them resulting in drastic reduct in the growth rate.

The fourth weakness is the worsening income distribution, much unlike other Asian countries. The Chinese Communist Party drastically curtailed spending on social welfare and diverted all the money including profits into investment. Consequently hardly any money went into social sectors. So the income distribution has worsened drastically. Anyway, given all these strengths and weaknesses they will have to chart an appropriate course, but the economy will gradually slow down.
The growth analysis in the book titled ‘Propelling India from Social Stagnation to Global Power’ underlies the projections about Indian growth a brief over view may be helpful. The book shows that the pre- 1980 period was characterized by socialist policies and stagnation. The economy grew at 3.5 per cent and poverty actually worsened. That is the greatest contradiction of this period of “Indian socialism.” Contrary to what numerous economist and development experts said there was no trade-off between growth and poverty reduction, slow growth went hand in hand with rising poverty rates. A policy shift toward freer markets occurred in the 1980s, starting slowly from the second term of Smt Indira Gandhi in 1980. It was fully underway by 1985 after Shri Rajiv Gandhi became PM in 1984. This raised the growth rate of economy by about two percentage points to 5.5 per cent. The 1990 reforms raised the growth rate further by 1.3 per cent to about 6.8 % per cent. More importantly, the effect of the 1990 reforms have spread slowly through out the economy so that the underlying growth rate of the economy has been rising gradually. Table 11 depicts the rising growth of the Indian economy. You can see that at the end in 2006 it is roughly between 7 and 7.5 per cent. The issue is whether this will keep growing. Our view is that an average growth rate of 8.5% to 9% is feasible over the next five years(See Table 12). Sustaining such rates of growth over a longer period of 15 years or so will only be possible if government systems are seriously reformed. There are some people who think it will continue rising even further to 10 per cent or more, but this is over-optimistic.
Regarding the Indian poverty the 11th Plan Approach paper has said is that the poverty rate in India in 2004 was about 22.5 per cent (MRP). This is not unusual for a country of our per capital income. Given our 1.1 bi population, the number of poor is about 250 million. There are only two countries in the world (China and USA) whose total population is more than the number of poor in India even if the poverty rate is normal. The size is huge because the population is huge, this must be kept in mind.
We have, however, not done badly in terms of relative per capita income. As far as income distribution is concerned if you rank all the countries for which data is available, we come out at 31 out of 127. That is we are in the top 1/3rd bracket where as China is in the bottom 1/3rd. This is one thing in which we are much better off than China. We can be rightly proud of it.
The reason for giving so much importance to economic growth is because an improvement in the welfare of the people is directly related to the increase in average income of the country (for any given income distribution). It is important to keep in mind that there are two types of goods – private goods and public goods. Private goods are those which people can buy with their income and can consume themselves. This consumption is the basis for calculating poverty rates- We define some consumption level and find out what proportion of people have a consumption less than this level. In contrast to private goods, Public goods have to be supplied by the government. For example, nobody can have personal road to move around in the city or across the country. In India the major failing of government (and its intellectual advisors), has been in the supply of public goods and services. This is the most fundamental failure of governance (and government policy). It is in Public goods and services such as police, legal system, administration, political system, roads, public health, public education that we have failed relative to other fast growing economies such as China. These depend on the government and this is where deterioration and the biggest failures have persisted over decades. Because of this weakness we are modest in our growth assumption for India, assuming that a growth rate of 7% plus will persist for a decade or so and then decline very gradually.
Evolution of Major Economies
We are now ready to look at the evolution of the major economies of the World. We start with a projection that reflects the conventional wisdom that prevailed circa 2004.
Table 13 reflects conventional wisdom (2004) GDP growth trend for major countries relative to the USA over the period up to 2049. This was based on an erroneous use of GDP at current exchange rates. It suggested that Japan’s economy (range) would decline gradually and that of China (pink) would rise at a faster pace to replace it as the second largest one with its GDP about 30 per cent of the US. India’s economy (green) would rise from very low to moderate level approximately equal to that of Japan at that time. The US would therefore continue to be the predominant economy and power for most of this century. China, though a significant player would not be in a position to challenge the USA, while India would at most be a swing State. In the case of Europe, even the conventional wisdom, expected that it would decline relatively and that China and India would rise relative to Germany, France, UK , Italy , etc.
Our academic work during the second half of 2004 (Dec 2004 working paper) sharply contradicted this projection. There were also reports that a CIA study had given more importance to India than that given by the prevailing conventional wisdom (CW). Our 2005 paper showed that the CW is totally wrong because over the next 50 years the size of the Chinese economy would be two times that of the USA and the Indian economy could be as much as 140 per cent of the US economy. This was a completely different view of the world from the prevailing conventional wisdom.
Tables 14 and 15 show the GDP at PPP of countries relative to the US GDP at PPP. The former depicts the Multipolar World Economy, with the EU (EMU+UK) included, while the latter shows the large countries of Europe separately. We see that China’s economy will equal the US in about ten years. India is likely to take 30 years to reach parity. It is therefore a lesser economic competitor of the USA. Russia’s economy will rise to equal a declining Japan by around 2050 (table 14).
Table 16 depicts GDP (PPP) relative to the USA for ASEAN and other Asian countries like S. Korea and Australia. Korea in global terms has increasing relevance and will become significant over the next 20 years as Europe, Russia and Japan decline relatively. The problem with ASEAN is that it is not even a cohesive economic bloc like the EU was even in its earlier avatar of an economic community. ASEAN can therefore not even be called an economic power. The potential exists. The size of ASEAN will by 2050, be about 42 per cent of the USA, compared about 60 per cent for the EU.
What ASEAN does quite successfully is to use its high growth rates and favorable location to get a lot of attention. ASEAN is located strategically in relation to China, India and the Middle East and thus has leverage. But in terms of becoming a power to reckon with, they must first get much more integrated and strengthen ASEAN institutions. Only then can they hope to become a ‘virtual state’.
Tables 17 and 18 depict the evolution of the Power Potential of different powers in terms of the index of power VIP2 discussed earlier. The former gives the picture of India vis-a vis the current regional powers that it is likely to overtake. The latter shows the bigger picture with respect to the USA and China. In about 20 years or less India would become a global power(table 17). Its power potential would reach 25 per cent. By that time Japan would have declined to below 25% and soon cease to have a power potential to classify it as a global power. However, for the next 20 years or so Japan will remain a global power and is can still play a significant role in the World. Indo-Japan will therefore remain of great importance for us. It will also be in our interest to collaborate with the EU and or the developed countries of EU to accelerate our development in the next 20 to 25 years.
Table 18 depicts the transformation of Global Power equations from Unipolar to Bi-polar and subsequently to Tri-polar World Order. Currently, it is a unipolar world given that China’s power potential is far below the US. The huge current disparity will narrow substantially in about 25 years to become about 60 per cent of USA, and the world will start becoming bi-polar again. It is not essential for the power of the challenger to equal that of the dominant power for this to happen.
Once a threshold of 60% or so is crossed, US policy will start changing as it will not be able to do the things in Asia which they are currently able to do. Similarly, the effect of China on all the other countries will start getting felt. China’s power potential will be larger than the arithmetic sum of all the other countries of Asia put together.
Beyond this India will continue to catch-up slowly and by 2050 our GDP will be about 70 per cent of China and power will be roughly half of China (according to this conservative projection). This aspect has been shown in Table 19. This is very important for our economic diplomacy, political diplomacy and national security.
When I presented this tableical depiction in 2004-5 there are many people who felt that China’s growth will decline rapidly. Consequently, I projected different scenario’s including one of faster catch –up (Table 20). There are three trend lines for each of the two countries indicating high, mean and low. The scenario which I call ‘China low and high India scenario’ is most optimistic from our point of view. In this scenario if China grows according to the low scenario and India according to the high scenario, then we will catch up in terms of GDP growth in about 20 years. Remember the other scenario which I consider more realistic, even by the year 2050 we would only be 70 per cent. (See table 19).
There is generally a lot of difference between the power potential and actual power of a country. Actual power depends on the power potential (index), strategic assets and technology and the “will to power.” Strategic technology encompasses defense technology, nuclear technology, space platforms and so on. It is driven by public expenditure on development of strategic technology which also depends on economic power and strategic assets. For example, Russia is really cashing in on and benefitting from the huge investments made during the USSR period. The stock of strategic technology they built up does not disappear, it gradually declines but it is still there and they are very skillfully exploiting whatever is left, to maintain their power. There is a risk, however, in that over-investment in strategic assets can reduce the funds available for investment in the economy, consequently kill the golden goose. Russia over invested in strategic technology and therefore, they declined economically.
The third aspect is the ‘will’ to acquire power. This can be illustrated by comparing Japan and China . For 50 years since the Second World War Japan had no desire to become a powerful country, and, therefore, they have not become and they have not looked at it in those terms. They are not interested in strategic technology. Only recently has this begun to change. This window of 25 years in which Japan can still be classed as a global power is going to be very important for Japan and I believe for India also. Both must utilize it to develop wider and deeper interaction for mutual benefit.
An alliance with technologically advanced countries can play a major role in acquisition of strategic and defence technologies. We seem to have had a brahminical attitude that we must develop everything ourselves. That is not what major countries have done historically. Let me remind you, Russia, after World War II grabbed the German scientists, the German equipment and German blueprints and took them to Russia. They did not develop everything from scratch. If you really have the will to acquire power you just have to go after it wherever you can get it from. Another example is Pakistan. In economic terms it is not even a regional VIP, yet it has a strong will to counter India. It therefore went out and got the strategic technology from wherever it could lay its hands on it.

To conclude, there is a likelihood of change in global world order from a uni-polar to bi-polar world by 2025, and to tri-polar by 2050. If the European Union becomes a virtual state by then, the World would be quadri-polar. The balance of power in Asia is going to be critical. China will equal the collective power of Asian democracies --India, Japan, Indonesia, Russia, South Korea as well as Australia. I believe Russia is likely to use its Asian connections to enhance its power in Europe. China’s economy will be only a little smaller than the US plus India and we know from history that there is heightened risk of conflict when a power rises so quickly. The only exception has been the rise of USA relative to the UK. These two had very similar values and systems, which is not true for the USA and China. As long as China has the single party rule (Leninist party), its system is not likely to change enough to become similar to the USA. We cannot however, completely rule out the possibility that 30-40 years later China may become a democracy. If this happens, then of course there will be a different situation.
Given the most likely scenario, it becomes essential to reduce the risk of conflict in Asia. I believe that closing the economic and technological gap between India and China would produce a better balance of power and less temptation for China to use its rising power and result in greater stability. It would also permit a greater freedom of action for smaller Asian countries to rise. As far as ASEAN is concerned it is not even a proper economic entity. You must have heard that Brussels in Europe has a huge bureaucracy of the EU. ASEAN does not even have a proper secretariat. So unless they change, ASEAN does not have a major role in the next few decades. If 25 to 30 years later, they realise that they need to do something, then things may change.
Regarding technological cooperation, India has traditional connection with Russia and with Japan Cooperation is being strengthened. The EU appears to be quite receptive. With the USA I feel that the nuclear agreement is quite critical to facilitate better mutual trust. As an economist I believe in more competition. If you are exclusively tied with one country, it has a monopoly and you are at its mercy. If there are more countries trying to sell you equipment and technologies, you are in a stronger position. I do not agree when somebody says don’t have close relations with country x or country y. As far as I am concerned, you gain substantially if there is competition and that should be our objective. We should also utilise our democratic credential to have access to better technologies.
Relations between India and China are going to be critical for a stable balance of power. I feel normalisation of bilateral relations between India and China are very important and we must exploit our huge market potential. They are heavily dependent on exports for economic growth. There has to be some limit beyond which China cannot raise export share of the US market. Somebody will wake up and say you should not go further. So they are looking for new markets and one of them is India. There are a lot of barriers. We can start by removing barriers. We should trade with China like other countries -- Japan, Russia or anybody else. We can then move to free trade in goods and services through a bilateral agreement that encompass both goods and services.
With regard to Sino-Indian relations, there are three key issues, which I feel are important from the Indian perspective. One is a fair and equitable border settlement where I have a simple rule that the terms should be ‘no worse than’ offered by Chinese Prime Minister Chou en Lie in 1960. Secondly, China must stop Nuclear Proliferation to countries hostile to India. I did research on nuclear proliferation to Pakistan and was amazed to find that every single piece of equipment they needed for the bomb, was purchased in Europe. Yet they were not ready. The record shows that they got plutonium for the bomb and everything they needed for the final explosion from China, despite having got all the equipment from Europe. That is something we should be concerned about. It cannot be that China wants good relations with India but then goes on doing this. That should be part of our diplomatic engagement with them. Obviously, we don’t need to fight and swear at each other but it must be part of our diplomatic effort. Finally, it is important that China should recognize India’s due role in Asia and in the world. Five years ago they thought India was a nobody and China could behave in any way. That is changing and it is a good thing. But still we find that they are trying to build economic structures which exclude India. In my view, it is very important if we want to have a genuine peace and security in Asia, that we build inclusive structures where both India and China have equal roles. One of these ideas is as the Prime Minister of India said the Asian Economic Community and some ideas floated about the Asian Energy Community. Other areas must also be explored which include all major countries of Asia including India and China.

No comments: