"Oh, East is East and West is West, and never the twain shall meet" - thus, in the year 1889, wrote Kipling in his famous Ballad of East and West. Little did he know that globalisation was only less than a hundred years away.
The rise of once-upon-a-time poor countries has been the central economic story of our time. More than the growth, it is the pace of the growth that tells a more fascinating story. It took Britain 150 years, after the Industrial Revolution, to double its economic output per person. The US, the emerging market of its time, took 50 years to do so in its period of fast development. When China and India began their period of high growth in recent decades, they took 12 and 16 years, respectively, to double the per capita gross domestic product (GDP). And while Britain and the US embarked on their take-off with a population of 10 million, China and India started out with a population of a billion or so each. So, in terms of force, as a McKinsey report on emerging markets suggests, the two leading emerging economies in the East are experiencing roughly 10 times the economic acceleration of the Industrial Revolution at 100 times the scale.
In 2012, at market exchange rates, emerging economies accounted for 38 percent of world GDP and 61 percent of world growth. The transformation in world trade has been of a similar magnitude. At purchasing power parity, emerging markets accounted for 80 percent of world growth, with China accounting for 35 percent and India accounting for 10 percent. If you are a businessperson looking for growth and new markets, you have to look East (and perhaps South). Another way to see this is to look at market shares. Emerging markets have over three quarter of the world's market share in steel consumption, cell phones, and foreign exchange reserves. They account for more than one-half of the motor vehicles sold, with China overtaking the US as the largest car market in the world. They account for more than one-half of global investment. While China's investment story has been much commented upon, India's is just starting out.
Before examining the consequences of this shift in economic power, it might be useful to note that the East is recovering from a long growth recession lasting nearly 250 years. As Angus Maddison of the University of Groningen has noted, India was the largest economy in the world in the early 1700s, before the onset of the Industrial Revolution, with China close behind. India's goods were sold around the world, though not always welcomed. After all, it was only a few miles from here that tea from the East, transported by the British East India Company, was unceremoniously dumped in Boston Harbour 240 years ago. Of course, we respect the sentiment that led you to do it, but hope you will not do it again. Fish do not drink tea and it would be a waste of good Darjeeling.
Going forward, China and India will continue to be drivers of world growth, with China growing at eight to 8.5 per cent and India at 6.1 to 6.7 per cent between 2013 and 2014. The Association of Southeast Asian Nations-4 (Indonesia, Malaysia, Philippines and Thailand) is also projected to grow at more than 5.5 per cent. China is reported to have already overtaken the US in economic size (measured by real per capita GDP in purchasing power parity terms) by 2012-13.
I do not wish to numb you with numbers. But let me mention one other well-known difference between a number of emerging markets and industrial countries: it is the demographics. A lot of the growth in the East is still to come as it reaps its demographic dividend. For instance, India's share of the working-age population will continue to rise. Nearly one-half the additions to the Indian labour force over the period 2011-30 will be in the age group 30-49, even while the share of this group in advanced countries will decline. This means greater production, savings and investment in India as the demographic dividend is reaped.
So what do these changes in the locus of global demand mean? Before I turn to that, let me first say not all the patterns we had seen emerge in global savings and investment, before the global financial crisis of 2008, were sustainable. Indeed, the financial crisis could be seen as evidence that the imbalances that were building up were unsustainable.
Simply put, the industrial world, even as its population was ageing and as promised entitlements were becoming due, increased spending, and financed the spending with huge amounts of debt. Many emerging markets built up substantial trade surpluses as they gleefully catered to industrial countries' demand. And, ironically, they financed industrial countries' consumption by investing their savings in industrial countries' paper.
This served both industrial countries and emerging markets while it lasted. For industrial countries, strong consumption growth papered over looming fiscal problems. Emerging markets, too, benefited as net exports grew. But it could not last. Sovereign debt, bank debt, and household debt in the industrial world increased to the point that investors were reluctant to buy more paper. Hence, the industrial world is being forced into austerity.
Emerging markets, too, have not been immune to the resulting slowdown. Even though, unlike other emerging markets, India has been a net importer of goods and capital, it has also become more open over this period - the sum of Indian goods and services traded exceeded 55 per cent of GDP in 2011-12. The slowdown in industrial countries has affected India, especially exports.
Ladies and gentlemen, the world has to adjust. Industrial countries have to save more while emerging markets have to spend more. Such an adjustment will help industrial countries pay down heavy debt loads, even while leaving global demand to be supported by the emerging markets. Of course, the nature of spending will vary across emerging markets. China probably has to consume more, while India has to invest more. But as the world moves towards one where consumption and investment shifts towards the emerging markets, especially in Asia, and ageing industrial countries will learn to save more, what are the opportunities and challenges?
Edited excerpts from Finance Minister P Chidambaram's speech on "Rise of the East: Implications for the Global Economy"at Harvard University on April 16
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