The Great Convergence: China, India and the new global economy Mark Thirlwell Program Director, International Economy July 2006
India Two views of the largest economies in 2005 Top 12 economies by GDP, PPP Top 12 economies by GDP, US$ % of world GDP % of world GDP 25 30 20 25 15 10 20 15 10 5 5 0 US China Japan India Germany UK France Italy Brazil Russia Canada Spain Source: IMF World Economic Outlook April 2006 database 0 US Japan Germany China UK France Italy Canada Spain Korea Brazil
Convergence, divergence and the onset of modern economic growth (MEG)
GDP and population before MEG GDP and population shares (1500) % of world total 30 25 Population GDP 20 15 10 5 0 China India UK US Source: Angus Maddison, The world economy: historical statistics, 2003
Escaping the Malthusian trap World GDP per capita 1990 dollars, PPP basis 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2001 Source: Angus Maddison, The world economy: historical statistics, 2003
GDP per capita The Great Divergence 1990 dollars, PPP basis 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 China India UK 1600 1700 1820 1870 1913 1950 1970 Source: Angus Maddison, The world economy: historical statistics, 2003
GDP and population after MEG GDP and population shares (2000) % of world total 30 25 Population GDP 20 15 10 5 0 China India UK US Source: Angus Maddison, The world economy: historical statistics, 2003
A big rise in global inequality Global inequality: within and between countries 1.0 0.8 Total inequality 0.6 Between countries 0.4 0.2 Within countries 0.0 1820 1870 1910 1950 1970 Source: Bourguignon and Morrisson (2002)
The possibility of catch-up... and overtaking Japan: GDP per capita % of UK level 120 100 80 60 40 20 0 1870 1890 1910 1930 1950 1970 1990 Source: Angus Maddison, The world economy: historical statistics, 2003. IMF World Economic Outlook April 2006 database
The start of the Great Convergence? Relative GDP per capita % of UK level 25 20 China India 15 10 5 1980 1985 1990 1995 2000 2005 Source: Angus Maddison, The world economy: historical statistics, 2003 and IMF World Economic Outlook database (April 2006)
Why Great Convergence? A question of scale
Ten largest countries by population 1950 2005 2050 Pop n (bns) Cumul. % Pop n (bns) Cumul. % Pop n (bns) Cumul. % 1 China 0.56 22.0 China 1.32 20.4 India 1.59 17.5 2 India 0.36 36.2 India 1.10 37.4 China 1.39 32.9 3 USA 0.16 42.5 USA 0.30 42.0 USA 0.40 37.2 4 Russia 0.10 46.6 Indon 0.22 45.5 Pak 0.31 40.6 5 Japan 0.08 49.9 Brazil 0.19 48.4 Indon 0.29 43.7 6 Indon 0.08 53.0 Pak 0.16 50.8 Ngeria 0.26 46.6 7 Ger 0.07 55.7 Russia 0.14 53.0 Brazil 0.25 49.4 8 Brazil 0.05 57.9 Bangla 0.14 55.2 Bangla 0.24 52.0 9 UK 0.05 59.9 Ngeria 0.13 57.3 Congo 0.18 54.0 10 Italy 0.05 61.7 Japan 0.13 59.2 Ethpia 0.17 55.9
How big a footprint? 2005, % of world... China India US population 20.4 17.0 4.6 GDP (US$) GDP (PPP) merchandise exports merchandise imports commercial services exports commercial services imports manufacturing value added (2003) 5.0 15.4 7.3 6.1 3.4 3.6 6.9 1.7 6.0 0.9 1.2 2.8 2.9 1.2 28.1 20.1 8.7 16.1 14.6 12.2 23.3 Sources: World Bank on line indicators. Rank reported for top 20 economies only.
Two paths to convergence
Industry v Services model Structure of GDP % of value added 55 China India 45 35 25 15 5 Agriculture Industry Services Source: World Bank World Development Indicators
Openness compared Ratio of trade to GDP % 70 60 50 China India 40 30 20 10 0 1970 1975 1980 1985 1990 1995 2000 Source: World Bank World Development Indicators
The results GDP per capita US$ terms, current prices 2,200 1,800 1,400 China India 1,000 600 200 1980 1985 1990 1995 2000 2005 Source: IMF World Economic Outlook April 2006 database
China s convergence story: The world s factory
China s rising share of world trade... China's share of world merchandise trade % 8 7 6 5 Ex ports Imports 4 3 2 1 1980 1985 1990 1995 2000 2005 Source: WTO international trade statistics database
... and growing share of export markets Share of selected world export markets % of total Clothing Textiles Automotive parts Office machines & telecom. Chemicals Iron and Steel 2004 1980 Total manufacturing 0 5 10 15 20 25 Source: WTO international trade statistics database
India s convergence story: The world s back office
India s growing share of world services trade India's share of 'other' world commercial services exports % 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1980 1984 1988 1992 1996 2000 2004 Source: WTO international trade statistics database
Global labour arbitrage for white collar workers? Hourly wages in US dollars (2002-03) US India Telephone operator 12.57 Less than 1.00 Health record technologist Payroll clerk Legal assistant Accountant Financial analyst 13.17 15.17 17.86 23.35 33.00-35.00 1.50-2.00 1.50-2.00 6.00-8.00 6.00-15.00 6.00-15.00 Source: Table 3 in Bardhan and Kroll The new wave of outsourcing Fisher Centre Research Report, 2003
Living with the Great Convergence: Supply, demand, and geopolitical shocks
The supply shock: more labour... Working age population in 2005e millions 1,000 750 500 250 0 China India US W. Eur Japan Mex Kor Aus Source: United Nations Population Division (median variant). Working age population aged between 15 and 64.
... plus cheaper labour... Hourly labour costs in manufacturing, 2002 Index US = 100 (US$21.11) 100 80 60 40 20 0 US EU 15 JapanA ustraliaa sian NIEs Mexico China India Source: Adapted from Chart 1 in Judith Banister Manufacturing earnings and compensation in China, Monthly Labour Review, August 2005. Australia from BLS web site, India Author estimate.
... equals cheaper goods Real import prices for advanced economies Index, 1995=100 180 160 140 120 100 80 1970 1975 1980 1985 1990 1995 2000 Source: IMF World Economic Outlook April 2006
The demand shock: feeding the hungry dragon Chinese demand as % of world output 1996 2000 2005 Cars 1 2 7 Steel Iron ore Aluminium Copper Cotton Oil 13 17 12 7 22 5 16 27 17 16 23 6 33 42 28 22 41 8 Sources: Oxford Economic Forecasting
Pressure on commodity prices Selected commodity prices Index, 1995=100 350 300 250 Copper Iron Ore Zinc Crude Oil 200 150 100 50 1995 1997 1999 2001 2003 2005 Source: IMF World Economic Outlook April 2006 database
A more equal world? Global inequality: within and between countries 1.0 0.8 Total inequality 0.6 0.4 Betw een countries 0.2 Within countries 0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source: Sala-i-Martin (2002)
Australia: Surfing another Asian development wave?
Bilateral trade is booming Australian merchandise exports % of total 12 10 China India 8 6 4 2 0 1980 1985 1990 1995 2000 2005 Source: IMF Direction of Trade Statistics
The lift to Australian income Australia's terms of trade Index, 2003/04=100 125 115 105 95 85 75 Source: Reserve Bank of Australia Sep-59 Sep-69 Sep-79 Sep-89 Sep-99
The Great Convergence: China, India and the new global economy Mark Thirlwell Program Director, International Economy July 2006