Friday, April 29, 2005

A Tripolar Century: The USA, CHINA And INDIA

The fast growth of Japan till the mid-eighties, gave birth to several books about the Pacific Century and the Asia-Pacific Century. This talk gradually disappeared after the bursting of the Japanese bubble. The talk revived with the phenomenal growth of the NIEs or Asian Tigers but was soon overcome by the Asian Crises. Virmani (1999) showed that India (the elephant) was among the ten fastest growing economies of the World since 1980 and projected that in the next decade its growth rate would accelerate above that of the Tigers and reach the top three. Though China’s past growth had been overestimated by about 2% it (the dragon) would remain the fastest growing economy in the World during the first decade of the 21st century.
Krauthammer had heralded the arrival of “The Unipolar Moment” and set of a debate on its many ramifications. The reality of the unipolar world returned to center stage after the Asian crisis even some have asserted that the unipolar moment had passed. Since 9/11 the USA has asserted its primacy and the Unipolar nature of the World has been re-asserted. There is, however, a variety of views on how long the unipolar world will last. The current paper argues that the global economy is evolving in a direction that will result in a tripolar World by the middle of the 21st century. Thus the 21st century will be a ‘Tripolar Century’ with two of the poles in Asia and one on the other side of the Pacific. So ironically it could end up as partly a Pacific, partly an Asia-Pacific and partly an Asian century.
Economic Basis of Global Power
The globalised world of the 21st century will be driven by economic growth. This is based largely on an economic view of power a la Paul Kennedy. The relative power of nation states will depend on the relative size of national economies. This in turn means that within the set of growing economies the rate of catch-up growth and relative population size, indicate the shape of the likely future.
Developed economies with relatively high per capita income are at the frontiers of technology (knowledge) and grow relatively slowly. Growth varies among them based largely on technological innovation. Low and middle income countries lie well within the technology frontier and their growth rate depends on the transfer of technology (knowledge) from the developed countries, and its adaptation, application and diffusion. Such knowledge flows take place through multiple channels, such as machinery import and investment, FDI, foreign trade, internet, media and travel. The globalisation of the World economy during the 20th century has removed many of the constraints on such movement and reduced the cost of such flows. The low and middle-income economies can in principle grow much faster than the advanced economies as long as their income is well below that of the advanced countries. The Asian tigers were the first to take full advantage of the benefits of globalisation. Other Asian countries have followed in their footsteps. Between 1980 and 2003, 8 of the 10 fastest growing economies in the world in terms of average per capita GDP (the measure of catch-up growth) were in Asia.
If catch-up growth is sustained over several decades, as it has in Singapore, Hong Kong the economy will eventually reach the technology/income frontier . The growth rate of an economy is likely to slow as it comes closer to the frontier and the scope for catch-up growth is exhausted and more of the growth must come from its own technological innovation. With per capita incomes/GDP almost identical, the relative size of the population is the primary determinant of relative economic size. Therefore over the medium-long term relative population is an important determinant of size. The economic size and therefore the relative power of large relatively fast growing economies will therefore rise over time. The two most heavily populated countries in the World are China and India. They are among the 10 fastest growing economies in the world and are projected to remain among the 3 to 5 fastest growing economies. Their relative power will therefore inevitably rise. The question is only about the speed with which this will happen and the level that will be reached.
Index of Power Potential
We define an index of relative power potential that is parameterised by a technological weighting factor ‘a’ that can range upwards from 0. It can be shown that, (i) When the technology weight is zero the power potential is captured by the relative size of GDP measured at purchasing power parity. (ii) When the technology weight is 0.4 the power potential is approximately equal to the relative size of the economy at current market exchange rate. The power potential index for country i (PPIi) is calculated as:
PPIi = (GDPi/GDPu)*(PCgdpi/PCgdpu)a ,

Where GDPi and GDPu are GDP measured at purchasing power parity of country i and the USA respectively and PCgdpi and PCgdpu are the per capita GDP at purchasing power parity of country i and the USA respectively. The second term in PPI therefore represents a technology factor that is applied to economic size.
The technology weighting parameter a gives extra weight to a country’s inherent technological capability. The reasoning is as follows. As a result of globalisation knowledge/ technology, capital and human skills can flow freely across countries given appropriate policies. If all technological flows were unconstrained by national restrictions then a weight of 0 would best represent market conditions as all technology can be freely purchased. Each country’s command over resources including technology is given by its GDP at purchasing power parity.
The flow of Defence, Strategic and ‘Dual use technologies’ are however constrained by national polices and technology denial regimes and cannot be bought on the market. In this situation a nations inherent technological capability is still important for the development of such technologies. Such inherent technological capability is most simply and effectively captured by per capita GDP measured at purchasing power parity.
The parameter a provides the extra weight on this (technology) variable. In our view a=0 captures the economic potential and a=0.4 the power potential of nations adequately and the latter will be the focus of our analysis. For those who think that military power and consequently strategic technological capability play a greater role than economic power, a would be set at 0.6 or 0.8. The main difference is that the USA’s predominance over other countries is heightened if the technology weight is increased. In addition the relative position of the poorer countries worsens much more than that of the richer ones. Currently China is a lower-middle income country while India is a low-income country and their ranking deteriorates if we use higher values of a. The position of Russia an upper-middle income country also worsens. However its power potential remains less than that of China, though it becomes higher than that of India.
Actual power can vary from the level indicated by the power potential index because of (a) Differing national objectives (the will to power). For instance the will to power of post-war Japan was very low, while that of the USSR was and of China since 1980 is, very high. (b) Different allocation of national revenues to military and strategic R&D and equipment relative to that on other public goods and services (e.g. environment). Thus Russia continues to benefit from the high investment of the USSR in strategic technology. (c) Alliances that transfer restricted technology and equipment and thus effectively supplement national technological resources. For instance in the past China used its alliance with the USSR to develop its strategic technology and also benefited from its informal partnership with the USA (President Clinton called China a strategic partner). Many countries including Israel have benefited in the past from their formal or informal alliance with the USA.
Sophisticated models of global power, such as those of Tellis et al (2000) have incorporated both economic and strategic technology dimensions of national power. The Index of Power Potential is designed to capture most of the economic factors analysed in such sophisticated models, in the simplest possible way (Principle of Ocam’s Razor).
Current Unipolarity
The USA is clearly the predominant power today. Japan the second ranked power has less than 30% of the power potential of the USA in 2002. China the third ranked power is just behind it with 1/4th the power potential of the USA. Germany with less than 1/5th of US power potential is next with France, UK and Italy occupying the next three positions with a power potential of little over 1/10th of the US. India according to this measure is next, followed by Canada and Spain. Neither Brazil nor Russia are in the top ten.
There are many foreign policy experts who question the importance of economic factors in national power by citing the cases of Japan and Germany. According to the Power Potential Index their relative power is less than 30% and 20% of the USA’s respectively. In 1975 the relative power of Japan was 31% in 1975. Germany was divided so its (W Germany’s) power was fragmented. This was not sufficient for either of them to have challenged US power even if they wanted to, given the fear and resentment that it would have aroused in their neighbours. It can also be argued that the victors of World War II the USA, France and UK ensured that the losers, Japan and Germany did not develop great power ambitions, by imposing a pacifist constitution and tying them into the EU/NATO and US-Japan alliances.
In complete contrast many observers continue to talk about Russia as a future great power as Russia’s actual power appears to be much greater than its power potential. Its power potential as per the Index is currently about 6% of that of the USA. It was however as high as 19% in 1981-1982 but has declined steadily since then. The economy of the Soviet empire (including former USSR and E European satellite States), which constituted a unified ‘virtual State’ ruled from the Kremlin/Moscow, was much larger than the Russia of 1982. Therefore the power potential of the USSR, whose data is not available, would have had a much higher PPI. This allowed the USSR to devote much more resources to the development of strategic technology and equipment, a legacy from which current day Russia benefits greatly.
A Tripolar Future
Based on our projection of growth of per capita income and the population projections of the United Nations, we conclude that the World will become tripolar by the middle of the 21st century. There is nothing sacrosanct about the precise numerical projections. What is important is the trends and the direction they are leading the world. During the first half of this century India’s population will increase from 3.6 times to 3.75 times that of the USA, while China’s population will decline from 4.5 to 3.4 times that of the USA. Population growth is not therefore the primary driver of the change from a unipolar to a tripolar world, even though it places these two countries in a much more favourable long term position relative to all other countries (e.g. Japan, Russia) and associations (EU, ASEAN). Over these 50 years China will become a high income country with its per capita GDP increasing from 11% of the USA’s to 57%. Similarly, India will become a higher middle-income country with its per capita GDP increasing from 7% to 36% of USA. The global economy will be transformed by this convergence of incomes, because for the first time in history it affects the two most populous countries in the World.
Figures 1 and 2 show the evolution of power potential of the most powerful countries when the technology parameter is set at 0 and 0.4 respectively. The latter can be taken as the mean scenario in terms of power potential and also captures the direct effect of the concerned economy on other countries and the World economy. Figure 2 shows that China’s power potential will equal that of USA by the end of the first quarter of the 21st century, while the power potential of India will equal that of the USA by the end of the 2nd quarter (1st half) of this century. Thus the World will become bi-polar within 25 years and tripolar within 50 years. By the middle of this century China could be the strongest pole of a tripolar world in which the combined power of the USA and India would be only a little greater than that of China. This has important implications for economic and technological co-operation between the USA and India.
Figure 2 also shows that Japan has passed the peak of its potential power and will be on a declining trend over this century. Its power potential has already fallen below that of China and will fall below that of India within the next 20 years. The gap between Japan and the European powers of the 20th century will close steadily over this century. It will however remain a significant power during the first quarter of this century, if it changes its pacifist approach and develops a more muscular foreign and national security policy. Recent statements of the Japanese Prime minister and joint statements with the USA in the context of the US-Japan security treaty give a hint of this change. If Japan indeed becomes a “normal nation” it can play a critical role in securing peace in Asia in co-operation with other democratic countries of Asia during the first quarter of this century. This process of change may however be too slow and incremental (given the strong resistance and the nature of consensual decision making) to significantly affect the balance of power in Asia.
According to our mean forecast the power potential of Russia will rise slowly to exceed that of Germany by the middle of the century. It will however remain less than that of Japan, reaching about 80% of that of Japan by mid-century. If these scenarios turn out to be correct, both Japan and Russia would be classed as regional powers at that point.
Will it matter if the best parameter for measuring power is 0.8 rather than 0.4? Not really, as the only affect would be to increase the time it would take for the world to become bipolar and tripolar! Even if the technological weight is increased to 0.8 China will clearly emerge as the second pole by the middle of the century as its power potential will be 65% of the USA by 2030 and equal it by 2040. In any case it is not necessary for a country’s power to exactly equal that of the strongest power to emerge as a second pole. A power potential of 50% to 66% (with a=0.8) would make a country an alternative pole. By the end of the first quarter of this century, China will therefore be in a position to challenge the US power in Asia. Whether and how it chooses to do so will depend on many factors including the Balance of Power in Asia and its level of Strategic technology.
Similarly in the case of India, even with a technology parameter of 0.8, India’s power potential will exceed that of Japan by 2030. By the middle of the century it will be about 60% of that of the USA. Thus it will emerge as a third pole in a tripolar world. By way of comparison, second ranked Japan’s power potential at the height of its potential power in the early 1980s was less than one third of the USA. It has declined to one fourth of the US by 2000. France, Russia and other countries had a fraction of this power potential and were therefore in no position to challenge the USA. In the case of the rich countries the power potential does not vary much with the technology parameter.
From our current vantage point it appears very likely that India will be the weakest pole in the tripolar world of the 21st century. As India and the USA share fundamental human, social, institutional and democratic values, it may be in the interest of the USA to ensure that the economic and technological gap between India and China is closed as rapidly as possible so that India can act as a stronger pole in Asia. This will also help expand the freedom of action of other countries in West Asia, Central Asia and of the members of ASEAN.
India the Third Pole!
Few observers have taken the possibility of India’s emergence as a global power seriously. As our projections for India and China differ significantly from those by earlier authors it is necessary to provide a rationale. In our mean forecast we expect China’s growth rate to fall gradually to more normal levels rather than collapsing abruptly as many earlier authors assume. The IMF has shown that China’s growth so far is on a trajectory similar that of Japan and the NIEs in a similar period of their development, though it is faster than that of the ASEAN-4. Many earlier forecasts (including those by the ADB, World Bank and IMF) that projected a sharp slow down of China’s economy in the near future have been proved wrong. This does not however mean that the possibility of sharp slow down can be ruled out, only that the timing is very difficult to predict. As long as China remains dependent on FDI-export led growth and subsidised supply of capital and intermediates to exporters (disguised as non-performing Assets of banks) the risk remains. The second factor is the overestimation of economic growth in the 1980s and 1990s by about 2% points. We expect this overestimation of 2% to be gradually eliminated from the published data and an allowance has accordingly been made for this in our forecast.
In contrast to China we assume a steady rise in the rate of growth of the Indian economy. Our analysis suggests that the extensive reforms undertaken in India in the early 1990s have so far increased growth rate by only about half a percent point because the negative effects of lower protection appear immediately while the positive effects appear gradually. The former reduces capacity utilisation of outdated capital while new more productive capital is built up gradually through investment and diffusion of best practice takes time. The underlying GDP growth rate will therefore rise over the next five years to 6.5%.
It will rise further to 7% thereafter, with continuing reform and the following factors. Firstly the fast growing (25% per year) Information technology and IT enabled services export sector will start contributing significantly to GDP growth. Though this sector is already a major contributor to exports, its share in GDP was minuscule. It is now becoming large enough for its continuing rapid growth to have a measurable impact on total GDP growth rate. Second, the un-exploited potential of FDI is likely to be utilised more fully in the next few decades. In contrast to China and ASEAN, India’s growth has been driven by domestic entrepreneurship while FDI has played a negligible role. A likely increase in FDI levels from $3-4 bi. in the past to $8-$10 billion in future will give a substantial boost to productivity and growth. The proven capability of Indian middle skills along with the availability of low wage unskilled labour and a new Special Economic Zone (SEZ) law, will attract increased FDI. Finally India is in the midst of its demographic transition and poised to exploit the demographic dividend. It will have the youngest labour force in the world. It will therefore become the primary source for goods and services that depend on such labour. For instance in many disciplines (e.g. physics), the most innovative ideas are developed by experts under 30 or 35.
An important common factor underlying the projected increase in India’s growth is the fuller use of the large under-utilised pool (20mi to 100mi) of independent minded, democratically confident, high IQ population. Another factor is the high level of social capital accumulated over centuries and the relatively high quality of its institutions (despite some deterioration over the past thirty years). It has been estimated that India’s current economic growth rate is about 2% points lower than that predicted by the quality of its institutions. Growth will therefore gradually rise to the predicted level with the correction of wrong policies.
Russia’s growth is also assumed to be much higher than it has been in the past. Even though the oil price rise has led to an acceleration of growth this push will end after oil prices have stabilised. Russia has the advantage of a relatively educated/skilled work force and vast natural resources. How effectively it will be utilised is however still uncertain.
European Union: Another pole?
Whether or not the European Union can emerge as another pole in a multi-polar world depends on its evolution into a “virtual state,’ that is a super-national body with elements of a nation state, such as the power to tax and to use the tax revenues for security (defence and offence). Its global power can in principle lie anywhere between that of its strongest member and that of the aggregate of all members depending on how much of it they surrender. For instance surrender of half the power by each country could mean that the EU virtual state’s power is up to half the total aggregate power of members (who would be left with only half their original power). The economy of Europe and Central Asia (taken as approximating the future EU) is projected to decline from a little over 125% of the US economy to a little over 100% of the US economy. Half of this would mean about 50% of the USA’s power potential. According to current indications this amount of power accumulation by EU (surrender by member states) is unlikely. This is reflected in the increased resistance to surrender of financial power by joining the EMU, the strong push by Germany to become a permanent member of the security council and the move to include Asian Turkey into the European Union so as to strengthen multi-culturalism and diversity in the EU.
Though there have been periods in which the EU appeared to be moving in the direction of becoming a ‘virtual state’ its current direction appears to be towards an umbrella organisation with increasing soft power. The EU constitution, if passed will certainly make the EU administration another player on the global scene, though individual countries of the EU (Germany, UK, France, Italy) will continue to play an important role in the global economy. Even a surrender of a 1/4th of each members’ power to the EU will not, however, make the EU into the fourth pole of a multi-polar world. We are therefore sceptical at this time that the EU per se will aggregate enough power under it to become another pole in a multi-polar world.
Partnership For Peace
Within a decade China’s economy will become larger than the US economy and may be almost twice as large by the middle of the century (in terms of GDP at purchasing power parity). Its power potential will therefore equal that of the USA sometime during the second quarter of this century. The World will become bipolar much before that happens, probably towards the end of the first quarter. China will almost certainly challenge USA’s economic power in Asia and across the globe and likely be much more unabashed in asserting its economic claims in the South China Sea and its economic interests in Asia, Africa and Latin America.
In parallel, India’s economy will overtake Japan’s within five years to become the third largest in the world and likely equal the US economy in size by 2040. The world will therefore become tripolar by the middle of the century. The size and power of China relative to India is projected to peak within a decade (at 2.3 times and 3.1 times respectively). The absolute gap will however continue to grow till the middle of the century. India will consequently be the weakest pole in this tripolar world of the 21st century. As the USA and India share fundamental human and democratic values and have no conflicts of interest, it will be in their mutual interest to develop a strong partnership for economic and technological development. The USA as the predominant power today should strengthen India’s economic and technological capabilities so as to benefit in future from its young labour force and large potential supply of knowledge workers.
The partnership between the USA and India needs to be balanced by the development of co-operative and inclusive economic structures in Asia, based on the lessons of European history and the European Union. We must build an Asian Economic Community that includes all the major powers of Asia (China, India, Japan) as well as S. Korea and the ASEAN countries. The Indian Prime Minister, Mr Man Mohan Singh has endorsed this concept. By analogy with the European coal and steel community the Asian (petroleum) oil community proposed by India’s Petroleum Minister, Mr Mani Shankar Aiyer, could act as a precursor to the Asian Economic Community. The possible inclusion of West Asian and Central Asian countries can also be considered at some stage. The USA and the European Union should support this endeavour.

Figure 1: Projected Power Potential of the Major Powers

Figure 2: Projected Power Potential of The Major Powers

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