Arvind Virmani: Decline of the West

For over a century the US has been the largest economy in the world. Major shifts have, however, been under way since then. During the last 30 years the weight of the world economy has shifted from the US and the rich countries of Europe to China and India.

These trends will continue in the 21st century, bringing about a historic transformation of the world economy. The global economy will change from a uni-polar to a bi-polar one with the emergence of China.

This will be followed a decade and a half later by the emergence of India, converting the world economy into a tri-polar one.

The rich countries of Europe have seen the greatest decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage point each.

Within Asia the declining global share of Japan since 1990 has been more than made up by the rising share of China and India.

During the seventies and the eighties, ASEAN countries and during the eighties South Korea, along with China and India, contributed to the rising share of Asia in world GDP.

Between 1975 and 2002, Japan's share of world GDP fell by 1 percentage point while that of South Korea, ASEAN, India and China rose by 1 percentage point, 1.2 percentage points, 2.2 percentage points and 9.2 percentage points, respectively.

Thus, India's gains since 1980 have been much larger than ASEAN's and South Korea's but much less than those of China (Arvind Virmani, "Economic Performance, Power Potential and Global Governance: Towards a New International Order," ICRIER Working Paper No. 150, December 2005).

Uni-polar Global Economy: 2002

At the start of the new millennium, the rankings of the 10 largest economies in terms of size are shown in the table. The US, the largest economy, is almost twice the size of the next largest economy, China, and about three times the third largest economy, Japan.

Thus, the size of the US economy is larger than the next two economies combined, revealing clearly the uni-polar nature of the global economy. The fourth largest economy, India, is a little over one-quarter the size of the US economy.

The next five positions are taken by the big four of Europe: Germany, the UK, France and Italy. Brazil and Russia bring up the rear with their joint size less than that of India.

In turn, the size of these three economies together is less than that of China.

Bi-pole China

Within 10 years, the global economy will be transformed from a uni-polar to a bi-polar one. China is projected by us to become the largest economy in the world within 15 years.

Though India, like the rest of the world, has been falling behind China, its share in world GDP will continue to grow. Before the end of the current decade, India's economy will become larger than that of Japan, thus taking it to the third place, behind the US and China.

We measure the incremental impact of an economy on the rest of the world through trade and financial flow by change in GDP at the current exchange rate.

By the end of the decade, China will become a larger driver of global growth than the European Union's six largest economies. Similarly, India will be a larger growth driver than the United Kingdom, the most significant growth pole in the EU.

At this time the combined impact of the three Asian giants (including Japan) will exceed that of the US.

The global impact of other emerging economies is relatively small. In 2015, Canada and Russia are ranked 11th and 12th in terms of impact, which is less than a third of that of India at that time.

The South Korean economy in contrast comes in at the 7th rank with an impact that is half that of India's. Brazil's impact is projected to be much lower than that of Mexico.

India: 3rd Pole & Growth Driver

As the share of the US in world GDP falls (from 21 per cent to 18 per cent) and that of India rises (from 6 per cent to 11 per cent in 2025), the latter emerges as the third pole in the global economy.

By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe.

China's economy is projected to become 50 per cent larger than the US economy by 2025, and almost double that of the US by 2035. At this point, China's share in the world economy will be equal to the share of the US and Indian economies taken together.

All the other countries that are either currently members of the Security Council or aspire to become so will therefore have relatively small shares.

Japan, the largest among them, will have a share of about 5 per cent while the others (including Russia) will each have 2.5 per cent.

This scenario assumes that China will be able to sustain the "FDI-export" cum "zero capital cost" model of fast growth. The "FDI-export" model transformed ASEAN countries into "miracle" growth economies, but the Asian crises showed that it was heavily dependent on creating and sustaining optimistic expectations.

China's risk is heightened by it combining with "zero capital cost" to producers inputs including infrastructure that bury inefficiencies in the government banking system (implicit fiscal subsidies).

It is however hard to predict what kind of exogenous shock will knock such an economy off the high-growth knife-edge path to more normal sustainable growth rates.

By around 2025, China's impact (in terms of GDP at prevailing exchange rates) on world growth is likely to be larger than that of the US and India's impact larger than that of Japan.

By 2035 India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US.

China's impact will, however, be about 40 per cent more than that of the US.

Conclusion

The projected changes in the relative size of economies will have profound implications for global governance, the global balance of power, and the stability of Asia.

This phenomenal change in relative power poses a major challenge to the economies of Europe, North America, and Asia that very few seem to fully understand or appreciate.

(The author is director and chief executive, ICRIER. The views expressed are personal)