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Economic Growth And Geo-political Power: The Emergence of a Tripolar World

Economic Growth And Geo-political Power: The Emergence of a Tripolar World Dr. Arvind Virmani, Director and CE, ICRIER Indian Council for Research on International Economic Relations Introduction Economic Basis for Global Power “Power Potential” of a Nation State (VIP 2 )

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Economic Growth And Geo-political Power: The Emergence of a Tripolar World

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  1. Economic Growth And Geo-political Power: The Emergence of a Tripolar World Dr. Arvind Virmani, Director and CE, ICRIER Indian Council for Research on International Economic Relations

  2. Introduction • Economic Basis for Global Power • “Power Potential” of a Nation State (VIP2) • Actual Power: Complex Models (Tellis etc) • ‘Natural Balance of Power’ & Global Governance in 21stCentury (ICRIER WP # 150) • 21st C: Globalisation and Catch-up growth • Projection of large Ecs: Scenario till 2050 • Implication for National & International Security and Foreign Policy • Ending Nuclear discrimination against India ICRIER: AV

  3. Overview • Size: Population & Per capita Income • Globalisation, Policy Reform & Catch-up growth • Future (20 large econs): Mean Scenario • Chinese & Indian Economy • Tripolar Global Economy & Potential Power • Key: USA-China-India relations not Multi polarity • 21st Century: Economic interdependence, Conflict risk. Not military alliances, cold war or containment • Policy Implications (Interdependence, Conflict risk) • China challenge for US power in Asia • India-US Partnership important for both • India, China Bilateral critical to Asian/global peace • Inclusive Structure patterned on EU: • Asian Economic Community ICRIER: AV

  4. Size: Share of World GDPppp ICRIER: AV

  5. World Population Shares ICRIER: AV

  6. Catch up Growth Potential:Per Capita Income (GDP) Gap ICRIER: AV

  7. Global Imbalance: GDP & Population ICRIER: AV

  8. Global Imbalance: GDP - Pop Share ICRIER: AV

  9. Per Capita GDP growth: 1980 to 2003 ICRIER: AV

  10. Population Projections: UN 2004 ICRIER: AV

  11. Income Growth: Catch-up • Population perspective: • EU 4th pole iff it becomes “Virtual” State • Only Tri-polarity is possible. Will it happen? • Scope for Catch-up: India is a low income country, China is lower-middle income. • Trends in growth of per capita GDP. • How quickly will China slow down • Can India maintain its growth rate? Raise it? • Invention/innovation? Important within high-income country category! ICRIER: AV

  12. Per Capita GDP Growth Projections ICRIER: AV

  13. China: Growth Model • Goal / Objective : National Power • Growth Maximization s.t. CCP retaining power • Decentralized to & ensured at all levels: • Nation, Province, City, Firm • Corporate growth maximization, market share, export • Means: Maximize Investment • Foundation of Growth: Public Investment • High Public Asset Ownership->Reinvestment of returns –> high investment with low tax rates • Engine of Growth: FDI and Exports • FDI-export led growth ICRIER: AV

  14. China: Weakness and Risks • Weakness: Other side of coin of past growth drivers • Govt. Ownership: Excess capacity, Falling returns, Rising NPAs, Falling public saving/investment • Rising export share =>Falling unit values; Rising subsidies (NPAs) • Knife-edge character of FDI-export model • Asian crises (euphoria risk) • Over dependence on FDI • Gr. obsession: Worsening Income distribution • Projection: Growth goes to 7.5% (9.5%-2%) and declines gradually thereafter ICRIER: AV

  15. Indian Reforms & Growth • Average Growth since 1992 is 6.1% • 0.6% higher than 5.5% (1980 to 1991) • Underlying Growth Trend: 6.1%=>6.5% • J curve of Liberalization ICRIER: AV

  16. India: J Curve Of Liberalization ICRIER: AV

  17. Indian Income Distribution & Poverty: Non-Issue? • Non-Issue: Poverty: Low average income • HCR=23%, Abs 230 mi -> pop size, Freedom -> Visibility • 2010: LMIC, HCR =15% • 2025: UMIC, HCR= nil • Gini 31/127 countries (China 91/127) • Bottom 10% share: 6/127 country ICRIER: AV

  18. India: Weakness • Governance Deterioration • Public Goods & Services (police, legal system, administration; Political corruption) • Political Reforms needed: Happen slowly • Implications of Government Failure • A New Development Paradigm: Employment, Entitlement and Empowerment, Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. • Accelerating Growth and Poverty Reduction – A Policy Framework for India’s Development, Academic Foundation, New Delhi, January 2004. ICRIER: AV

  19. GDP at PPP (relative to USA) ICRIER: AV

  20. Incremental Impact: Country/USA ICRIER: AV

  21. Global Growth Drivers:Incremental Impact • Current & Immediate Future • China is now the second largest growth driver after USA • India will overtake UK by 2008 to rank 4th • India will overtake Japan in 3rd place by 2016 • Twenty Years & Beyond • China will overtake USA in 1st place by 2027 • India’s incremental impact will become 2nd highest by mid-century ICRIER: AV

  22. Index of Power Potential: VIP2 • GDP (at ppp): Y = N * y • N= Population, y=Per Capita Income • Globalisation and Tech flows • y = T f(k, h, r) or T = y/f(k, h, r) • T=technology, h=Human Capital/skills • Strategic & Dual Use technology restricted • Power Potential (PP) depends on General Technological Capability T or y • Virmani Index of Power Potential • VIP2 = (N/Nus) * (y/yus)1+a = (Y/Yus) * (y/yus)a • a = technology weight; 0 < a < 1 • Mean Scenario: Assume a=0.5 ICRIER: AV

  23. Actual Power VIP and VIP2 • Actual Power: Depends on • Public Expenditure on Development of Strategic Technology. This is affected by the • Will to power (contrast Japan & Russia, India & China) • Cost (p) and efficiency of expenditure. Depends on • Alliances (technology, equipment) respectively. • Kst = pt Et – δ Kst-1 , • Kst is the stock of strategic technology at t • Et =expenditure on this technology valued at the shadow price/cost pt (not actual cost in each country) • δ is the rate of depreciation of the stock. • The Virmani index of actual power (VIP): • VIP = VIP2 * (Ks / Ksus ) ICRIER: AV

  24. VIP2: Index of Power (a=0.5) ICRIER: AV

  25. India/China: GDP at PPP and Power Potential ICRIER: AV

  26. Sensitivity Of VIP2 to Technology Weight a ICRIER: AV

  27. SUMMARY CONCLUSIONS • Bipolar World By 2025 • China will challenge US power in Asia • Tripolar World by 2050: • India weakest pole, China strongest! • Balance of Power: 2050 • China equal to 6 largest Asian democracies (India, Japan, Indonesia, Russia, S Korea, Australia) • China’s economy will be 40% smaller than US + India; Its Power may be 1/3 rd less • History Lesson => Heightened Risk of Conflict between the rising power and others • Exception: USA & UK (Overlap of values, systems) • China: Leninist Party. Single party rule. ICRIER: AV

  28. SUMMARY CONCLUSIONS • How to Reduce the risk of conflict? • Close economic and technological gap between India and China • Better balance of power => less temptation => greater stability • Greater freedom of action for smaller Asian countries • Technological collaboration between India & Russia, Japan, EU (UK, France, Germany, Italy), USA. ICRIER: AV

  29. Indo-US Partnership for Peace • CECA (Comp Econ Coop Agreement) • Services, FDI, Movement of skilled people. • Strategic Partnership • Technology • Dual Use Technology • Nuclear Power plants & equipment • Strategic: Space, NMD • Defense: Co-production, R&D (IT) • Global Governance: G8, UN reform; ICRIER: AV

  30. India-China-Asia • Normalization of Bilateral India-China Relations (Critical to Peace & Security in Asia) • Exploit Large trade potential-Remove barriers • Three Key issues from India’s perspective: • Fair & Equitable Border Settlement: ‘No worse than’ offered by PM Chou en Lai in 1960s • Stop Nuclear Proliferation to Hostile countries • India’s due role in Asia and World (UN) • Inclusive Economic Structures patterned on EU • Asian Economic Community (<= EAEC) • Asian Oil/Energy Community • Greater Co-operation among Asian democracies (India, Japan, Russia, S Korea, Indonesia, Australia) ICRIER: AV

  31. References • “A Tripolar World, India, China & US,” Lecture delivered at India Habitat Centre on May 18, 2005 ( http://www.icrier.org/public/TripolarWrld_IHC5.pdf ). • “Economic Performance, Power Potential and Global Governance: Towards a New International Order”, Working Paper No. 150, ICRIER, December 2004( www.icrier.org/wp150.pdf ). • “A Tripolar Century: USA, China and India,” Working Paper No. 160, ICRIER, March, 2005 ( www.icrier.org/wp160.pdf ). • “China’s Socialist Market Economy: Lessons Of Success”, ICRIER Occasional Policy Paper, April, 2005 ( http://www.icrier.org/China05_policy7.pdf ). • VIP2: A Simple Measure of Nations (Natural) Global Power, ICRIER Occasional Paper, July, 2005 ( http://www.icrier.org/vipp4.pdf ). ICRIER: AV

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