Arnold Kling  

China and India

Sounds Right to Me... The Pig Club...

In the February 12 issue of National Review, not yet available on line, John O'Sullivan writes,

Several estimates suggest that China, India, and the U.S. will between them account--and roughly account equally--for three-quarters of world GDP by mid-century...The same Europe falling to about 10 percent.

I don't know about that. The U.S. accounts for just over 20 percent of world GDP today, and Europe accounts for about 25 percent. China accounts for about 12 percent, and India accounts for under 6 percent. That leaves 37 percent for the rest of the world, and if you believe "the estimates" that would fall to 15 percent by mid-century [I said 5 percent in the original post--a commenter corrected the typo/arithmetic]. (Their GDP need not fall in absolute terms to make the arithmetic work, but their per capita GDP probably does not increase in this scenario.)

If I had to bet on whether the share of GDP accounted for by the rest of the world would be higher or lower than what it is today, I'd say higher, although the uncertainty is enormous. There are some big, baby-abundant countries in the "rest," with a lot of upside potential if they can get their institutional acts together. I don't know who will be the next success story after China and India, but "nobody" seems like an unlikely scenario.

But I didn't meant to go off on that. The point of this post was to mention an article in the Milken Institute Review by Diana Farrell and Susan Lund on weaknesses in China's and India's financial systems.

China’s financial system makes poor use of its captive pool of savings. Partially or wholly state-owned companies absorb 73 percent of bank loans, even though their average productivity is just half that of private companies. The private sector now produces more than half of China’s GDP, but get just 27 percent of the bank credit.

...[In India] some sectors pay nearly double the real interest rates charged in China. Indian companies must thus rely on retained earnings for nearly 80 percent of the funds they raise.

The root of this capital squeeze is government dominance of India’s financial system. Banks and other financial intermediaries are required to hold a large portion of their assets in government securities in order to make it cheaper for the government to its persistent deficits. This regulation, combined with the banks’ obligation to invest 36 percent of their loan portfolios in the government’s priority sectors, guarantees that India’s public sector gets the majority of the capital raised by the financial system.

Comments and Sharing

COMMENTS (6 to date)
David writes:

Well, I agree with the fact that America, India, and China will become predominant GDP producers. If you think about it, Europe may have a lot of that covered right now, but I believe in the future that it will diminish there for a few reasons: one being that oil and other goods that need oil are coming out of China, India, and America, which consist of cars, strait old oil, and other goods. Also, a major thing that is now very prevelant, the outsourcing and offshoring of IT and other Internet/Intranet work. All of this will have major contributions to the GDP distribution.

Robert Speirs writes:

Shouldn't the "rest of the world" figure at mid-century be 15%, not 5%? If China, India and the US account for 75% and Europe for 10%, that equals 85%, leaving 15%, not 5% for the rest of the world.

Aside from the numbers, I agree with the possibilities, not because Europe or the rest of the world will decline in absolute terms but because ambition and competitiveness will push China, India and the US to undreamed-of heights. The European socialists have proven they are content to tread water, take long vacations and soak the rich. That's not a recipe for explosive growth.

aaron writes:

Are there non-bank loans available to private companies? Do the state owned companies loan money to the private sector?

raj yashwant writes:

These predictions are based on models and those models are based on assumptions. Now what happens if those assumptions do not hold valid or are broken, the scenario may not occur. All scenario predictions have a probablity of occurance associated with it. What is the probablity that this scenario would occur?

China and India have lot of issues to scale up their economies. First they have huge population to deal with. While it may serve as demographic advantage, population after certain level becomes difficult to manage.

China has weak institutions with government controlling major institutions in banking and enterprises, which is a huge disincentive for free market and growth. Is the china model sustainable? Economists have raised questions on it.

Similarly, India faces institutional and structural problems which would act as huge hinderance for growth. Would India economy be competitive if its currency appreciate over a period of time?

What is global investors lose confidence in the american dollar and it weakens, which might result in investors pulling of assets in dollars. How would they be able to sustain the consumerism of U.S economy?

Predictions have a assumptions underlying with it and they need to be taken with pinch of salt. Predictors are like astrologers, they can pass statements without responsiblities

Jeff Hallman writes:

Re: Indian companies financing out of retained earnings, I wonder about a couple of things. First off, are Indian corporations somehow barred from raising additional capital via equity issuance? If not, why does it matter where their capital comes from? Second, if there are such barriers, perhaps the way to overcome them is by conglomerating, similar to the way the Korean chaebols combined huge numbers of businesses in radically different industries under only a few corporate umbrellas. Of course, this creates agency problems, but surely there are institutional designs to ameliorate them.

Dog of Justice writes:

It is easy to think that there must be "someone next" in the entire rest of the world, I mean, there are so many possibilities, how can they all fail?

The answer is that (i) they won't all fail, but (ii) how large will be the successes be?

India has more population than Africa and South America COMBINED, and China is even larger. While they don't mark the end of the benefits of globalization, they do mark an inflection point. There will be diminishing opportunities of that sort in the future (and that's of course a good thing; after all the goal is to eliminate all such opportunities).

In the meantime, a technical nit: why the hell was Japan included as part of "the rest of the world"? I understand the desire to avoid special cases, but Japan's economy is large enough to massively distort the numbers and give a very misleading impression of "the rest of the world".

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