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
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