The Great Convergence: China, India and the new global economy fileThe Great Convergence: China, India and the new global economy Mark Thirlwell Program Director, International Economy

The Great Convergence:China, India and the new global economy

Mark ThirlwellProgram Director, International Economy

July 2006

Two views of the largest economies in 2005

Source: IMF World Economic Outlook April 2006 database

0

5

10

15

20

25

USChin

aJa

pan

India

German

y UKFranc

eIta

lyBraz

ilRus

siaCan

ada

Spain

Top 12 economies by GDP, PPP% of world GDP

0

5

10

15

20

25

30

USJa

pan

German

yChin

aUK

France

Italy

Canad

aSpa

inKore

aBraz

il

Top 12 economies by GDP, US$% of world GDP

India

Convergence, divergence and the onset of modern economic growth (MEG)

GDP and population before MEG

Source: Angus Maddison, The world economy: historical statistics, 2003

0

5

10

15

20

25

30

China India UK US

Population GDP

GDP and population shares (1500)% of world total

Escaping the Malthusian trap

Source: Angus Maddison, The world economy: historical statistics, 2003

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

110

0015

0016

0017

0018

2018

7019

1319

5019

7320

01

W orld GDP per capita1990 dollars, PPP b asis

The Great Divergence

Source: Angus Maddison, The world economy: historical statistics, 2003

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,000

1600 1700 1820 1870 1913 1950 1970

China India UK

GDP per capita1990 dollars, PPP basis

GDP and population after MEG

Source: Angus Maddison, The world economy: historical statistics, 2003

0

5

10

15

20

25

30

China India UK US

Population GDP

GDP and population shares (2000)% of world total

A big rise in global inequality

Source: Bourguignon and Morrisson (2002)

0.0

0.2

0.4

0.6

0.8

1.0

1820 1870 1910 1950 1970

Global inequality: w ithin and between countries

Within countries

Betw een countries

Total inequality

The possibility of catch-up . . . and overtaking

Source: Angus Maddison, The world economy: historical statistics, 2003. IMF World Economic Outlook April 2006 database

0

20

40

60

80

100

120

1870 1890 1910 1930 1950 1970 1990

Japan: GDP per capita% of UK level

The start of the Great Convergence?

Source: Angus Maddison, The world economy: historical statistics, 2003 and IMF World Economic Outlook database (April 2006)

5

10

15

20

25

1980 1985 1990 1995 2000 2005

China India

Relative GDP per capita% of UK level

Why Great Convergence?A question of scale

Ten largest countries by population1950 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

5.0

15.4

7.3

6.1

3.4

3.6

6.9

17.0 4.6

GDP (US$) 1.7 28.1

GDP (PPP) 6.0 20.1

merchandise exports 0.9 8.7

merchandise imports 1.2 16.1

commercial services exports 2.8 14.6

commercial services imports 2.9 12.2

manufacturing value added (2003) 1.2 23.3

Sources: World Bank on line indicators. Rank reported for top 20 economies only.

Two paths to convergence

Industry v Services model

Source: World Bank World Development Indicators

5

15

25

35

45

55

Agriculture Industry Services

China India

Structure of GDP% of value added

Openness compared

Source: World Bank World Development Indicators

0

10

20

30

40

50

60

70

1970 1975 1980 1985 1990 1995 2000

China India

Ratio of trade to GDP%

The results

Source: IMF World Economic Outlook April 2006 database

200

600

1,000

1,400

1,800

2,200

1980 1985 1990 1995 2000 2005

China

India

GDP per capita

US$ terms, current prices

China’s convergence story:‘The world’s factory’

China’s rising share of world trade . . .

Source: WTO international trade statistics database

1

2

3

4

5

6

7

8

1980 1985 1990 1995 2000 2005

Exports Imports

China 's share of w orld merchandise trade%

. . . and growing share of export markets

Source: WTO international trade statistics database

0 5 10 15 20 25

Total manufacturing

Iron and Steel

Chemicals

Office machines & telecom.

Automotive parts

Textiles

Clothing

2004 1980

Share of selected world export markets% of total

India’s convergence story:‘The world’s back office’

India’s growing share of world services trade

Source: WTO international trade statistics database

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1980 1984 1988 1992 1996 2000 2004

India 's share of 'other' world commercial services exports%

Global labour arbitrage for white collar workers?

Hourly wages in US dollars

(2002-03) US India

Telephone operator 12.57

13.17

15.17

17.86

23.35

33.00-35.00

Less than 1.00

Health record technologist 1.50-2.00

Payroll clerk 1.50-2.00

Legal assistant 6.00-8.00

Accountant 6.00-15.00

Financial analyst 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 . . .

Source: United Nations Population Division (median variant). Working age population aged between 15 and 64.

0

250

500

750

1,000

China India US W.Eur

Japan Mex Kor Aus

W orking age population in 2005e

millions

. . . plus cheaper labour . . .

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.

0

20

40

60

80

100

US EU 15 JapanAustraliaAsianNIEs

Mexico China India

Hourly labour costs in manufacturing, 2002

Index US = 100 (US$21.11)

. . . equals cheaper goods

Source: IMF World Economic Outlook April 2006

80

100

120

140

160

180

1970 1975 1980 1985 1990 1995 2000

Real import prices for advanced economiesIndex, 1995=100

The demand shock: feeding the hungry dragon

Chinese demand as % of world output 1996 2000 2005

Cars 1

13

17

12

7

22

5

2 7

Steel 16 33

Iron ore 27 42

Aluminium 17 28

Copper 16 22

Cotton 23 41

Oil 6 8

Sources: Oxford Economic Forecasting

Pressure on commodity prices

Source: IMF World Economic Outlook April 2006 database

50

100

150

200

250

300

350

1995 1997 1999 2001 2003 2005

Copper Zinc

Iron Ore Crude Oil

Selected commodity pricesIndex, 1995=100

A more equal world?

Source: Sala-i-Martin (2002)

0.0

0.2

0.4

0.6

0.8

1.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Global inequality: w ithin and between countries

Within countries

Betw een countries

Total inequality

Australia:Surfing another Asian development wave?

Bilateral trade is booming

Source: IMF Direction of Trade Statistics

0

2

4

6

8

10

12

1980 1985 1990 1995 2000 2005

China

India

Australian merchandise exports% of total

The lift to Australian income

Source: Reserve Bank of Australia

75

85

95

105

115

125

Sep-59 Sep-69 Sep-79 Sep-89 Sep-99

Index, 2003/04=100

Austra lia 's terms of trade

The Great Convergence:China, India and the new global economy

Mark ThirlwellProgram Director, International Economy

July 2006