What the new ‘catch-up’ period is likely to bring

In the current economic catch-up period, two countries rapidly moving forward in the global economy, India and China.

One distinguishing feature of the profound adjustments taking place in the global economy from those that occurred in the previous catch-up periods is that new world economic leaders will be structurally very different from those of the past. The race to the top in the previous catch-up periods involved countries that had the same economic and social characteristics. Some of them had been rivals for long but one took off, leaving the other behind. This was the case with Britain in the 18^th century, which, for societal, institutional and technological reasons, took a lead over the European economy. Britain’s rapid advance created incentives for the countries that had lagged behind to catch-up. Different strategies were adopted by different countries. As economic historian Alexander Gerschenkron pointed out in his seminal work on economic backwardness, the state played an active role in getting the laggards to catch up with the front-runner: France with Britain and then Germany with both Britain and France.

In the current catch-up period, the two countries that are rapidly moving forward in the global economy are very different from those they have replaced as leaders, or are in the process of replacing. They have very large populations. China in 2009 had a population of 1,373 million, more than four times that of the current leader, the United States. China’s gross national income (GNI) was estimated in 2009 as $9.3 trillion in purchasing parity terms, and income per head at $6,770. On the other hand, per capita income in the US was $46,730, about seven times as large as that of China. India, with a population of 1,155 million, GNI of $3.8 trillion and GNI per head of $3,260 had the same economic characteristics as China’s. In other words, both China and India are significantly different from the previous leaders of the global economy — the US, Japan and some of the large countries of western Europe.

There are three important socio-economic differences among the new and old leaders of the global economy that will profoundly affect the way they will interact with one another in the years ahead. The first is what Alan Greenspan, once the acclaimed chairman of the US Federal Reserve System, had called the ‘weight’ of the gross domestic product (GDP). By that he meant that the GDP in developed countries, with a much larger share of services, which in turn drew much of their value from knowledge, was much lighter than those produced by the relatively less advanced economies such as China and India. Consequently, as the use of natural resources such as energy and minerals per unit of output was much larger for the latter than the former, pressure on them will increase over time with much large rates of economic growth in emerging countries.

The other two differences are demographic. China’s population growth in 2000-09 was 0.6 per cent a year, India’s 1.4 per cent. While the rate of increase in the American population of 0.9 per cent lies between that of China and India, those of Germany, Japan, France and the UK are tending towards zero growth. In 2000-09, the UK’s population was growing at 0.5 per cent a year; that of France at 0.3 per cent; of Japan at 0.1 per cent and of Germany at zero per cent. In other words, the developed world was approaching the stage where there will be little or no increase in the size of the population, while some populations may even begin to decline.

On the other hand, even with declines in the rates of population, the more populous countries in Asia are adding tens of millions of people to their already large populations. In 2011, for instance, China and India together will add more than 20 million people, Pakistan another 3.5 million. This demographic asymmetry will have profound implications: It will result in increasing the dependence of the currently rich countries on the work forces available in large emerging nations. As former President Bill Clinton pointed out recently in a detailed interview with an American news magazine, “There is a simple way to get Americans back to work: Make it easier for talented foreigners to come here and work.” Much of this talent is available in Asia, surplus of its albeit growing needs.

The third difference is that while today’s developed countries are already mostly urban — when people move in these countries, they mostly go from one urban area to another — in the emerging world, hundreds of millions of people will leave the countryside for towns and cities. In the next two decades, by the year 2030, a billion and half people will be in the urban areas of China and India, demanding the kinds of services and products already available in the developed world. This will change in a significant way the structure of world industrial and agricultural output and the pattern of international trade.

As we know from world economic history, such large adjustments in relative economic power seldom occur without serious conflict between those who are losing stature compared to those who are gaining it. Will something similar happen this time around? The situation in the early 21^st century is compounded by the competition among large economies over the world’s fast depleting non-renewable resources. Oil is the obvious commodity facing a serious supply stress but there are a number of other commodities that have reached the same situation. Since there are reports of the presence of large deposits of important minerals in both Afghanistan and Pakistan — in fact, a Pentagon report published by The New York Times in the summer of 2010 said that the “US has discovered nearly $1 trillion in untapped deposits in Afghanistan, far beyond the previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself” — there is considerable interest on the part Beijing to gain access to them.

Published in The Express Tribune, July 11^th, 2011.