Structure of the Presentation

2. Structure of the Presentation • Brief Historical Overview • Present and Future Trends • Historical Experience of Power Shifts • Positive and Negative Impact for the World • Frictions • What Has to be Done? • What are some of the Longer term implications?

3. 1. Brief Historical Overview • Both are Millennial Civilizations • Were Largest Economies of World for First Three Quarters of Last Two Millennia • Both Missed the Industrial Revolution • Fell behind Rising European Powers • Major Regime Change in 1950s • Are becoming major world players • Economically • Politically • In education and R&D

4. 2.The Present and Future Trends • The Present • China has already become second largest economy in world • India is tenth largest • By extrapolation of current trends • China will be as big as U.S. in 5 years in PPP terms, in 10 years in nominal terms • India will surpass Japan in 2 years in PPP terms to become third largest economy, in 10 years it will surpass Germany to be fourth largest economy in nominal terms

5. Historical and Projected Growth in Purchasing Power Parity

6. Historical Growth and Projections in Current US$

7. 3. Historical Experience of Power Shifts is not Encouraging • Rise of new powers lead to frictions over • Wealth (trade and resources) • Power • Security • These tend to degenerate into • Trade Wars • Resource Wars • Cold Wars • Conventional Wars

8. Rise and Fall of Powers Over Time WWI WWII Colonial Expansion European Powers Napoleonic Wars Cold War

9. China SWOT

10. India SWOT

11. 4. Five Positive Impacts • Growing Markets • Lower Prices of Goods and Services for Importers • Higher prices for natural resource and commodity exporters • Lower interest rates for world • Financial flows and investments in the rest of the world

12. Contribution to Global Growth

13. Five Negative Impacts • Tremendous competitive pressure on other countries producing manufactured goods and services they export • Increase in price on natural resources and commodities • Downward pressure on wages • Rapid technological catch-up through copying and imitation, plus now large domestic innovation effort, and purchasing of high tech companies • Negative environmental impact, including global warming

14. 5. Frictions • Trade • Resources • CO2 • Geopolitical

15. 5.1 Trade Frictions • Both countries, but particularly China have rapidly expanded exports • Export expansion is putting strong pressure on manufacturing (China) and services (India) jobs around the world • Politically charged in context of high unemployment in developed countries • Additional frictions • arguments about currency manipulation by China • intellectual property piracy • using access to domestic market to extract technology • purchases of national resource and high technology companies

16. China’s Exports Surpassed US in 2006 and Germany in 2009 ©cjd

17. Change in China’s Market Share in World (Four Global Markets by SITC Categories 6-8)

18. Global Trade Imbalances Continue

19. Ten Largest Tertiary Student Populations 2007

20. The R&D Input Landscape

21. 5.2 Resource Frictions • Both countries are resource poor on per capita basis (except for coal) • Put pressure on global resources, (energy in particular) • Access to resources is national security issue for these countries and raises frictions with rest of world • For example, China relationship with rogue regimes because it needs their resources • China building blue water navy to secure access petroleum shipped through Malacca Straits • China claim to islands in South China seas,

22. Ecological Footprint of Ten Largest Users of Environment 2007 WWF 2008

23. Biocapacity vs Ecological Footprint-2007

24. 5.3 CO2 Emissions Frictions • China became larger CO2 emitter in 2008, and largest energy user this year • India is still far behind, but within 20 years will be in similar position • By 2035 emissions from China, US, India will be as large as total emissions by world in 1990 while world needs to reduce emissions 50% those levels to avoid global warming • Both countries argue that problem is due to prior emissions by now developed countries and that they are too poor on per capita basis to incur higher costs of curbing emissions • US has refused to commit to reducing its own emissions unless China and India also commit—therefore world is caught in deadlock over C02 emissions • Additional risk that US will impose border tax on carbon content of imports from China and India which would exacerbate trade frictions

25. 5.4 Geopolitical • China’s successful authoritarian cum socialist economy model is gaining adherents • Has performed remarkably well for 30 years, plus much less affected by crisis • Offers an alternative to Washington Consensus development model for other developing countries • Concerns about security in access to natural resources leads it to • Trade with natural resource rich rogue regimes • Strengthen its military capability to ensure supply of natural resources and project military power to defend its interests

26. Increasing Frictions Trade & Environment

27. Increasing Frictions-Geopolitical/Security

28. Global Governance System • Was set up after WW II led by U.S. • Is having trouble dealing with issues it was supposed to cover • Trade (GATT/WTO) • Global financial imbalances (IMF/WB) • Security (UN/Security Council) • Does not address major new issues • Climate change • Cyber security • Terrorism with weapons of mass destruction • U.S. which has de facto been main provider of global public goods (open trading and financial system, security, technology, education) is overextended and fiscally constrained • Other countries are not stepping in to provide these global public goods

29. 7. What has to be done? Have growing friction points which the international governance architecture is not addressing Represent old power structures-need to be rebalanced Do not cover some of critical global issues such as International financial system and its regulation Environment, both from resource use as well as global warming Developing effective new institutional architecture will take time and will be messy Main countries/blocks have to do more at their own domestic level to manage problems to keep them from becoming worse

30. Environmentally Sustainable System 4. Desirable state: Requires cooperation on trade, finance, technology, environment, security, increased aid for poor countries, and more sustainable development strategies. 3. Alternative undesirable state: Protectionism slows global growth, increases poverty, ad hoc geo-engineering solution to climate change with unknown results. Fractured Global Economic System Integrated Global Economic System 1. Current unsustainable state Moving toward protectionism, new financial crisis, insufficient technology cooperation, resource conflicts, negative effects of climate change, growing inequality. 2. Most likely, but undesirable state Protectionism and regional trade/economic blocks, negative impacts of climate change. Likely to spiral into military confrontations over resources, exacerbated by disruptions from climate change. Environmentally Unsustainable System Alternative Scenarios

31. Key Tasks • Developing better rules for viability of global system • Very difficult to do through fully representative global forums • Start with agreements among main powers • Rebalancing • Trade deficit countries • Trade surplus countries • Reducing CO2 • US • China • India • EU and Japan • But these things are difficult to do for political economy reasons • Involved painful restructuring • Require strong vision and leadership • Also require greater awareness among population at large of what is at stake

32. 7. Longer Term Issues • Essentially issue of accommodating large rapidly growing new entrants • Challenges • Competitiveness and economic adjustment challenge (large global rebalancing of relative wages) • Addressing increasing global inequality • Finding more sustainable development models • Dealing with geopolitical competition

33. Changing Shares of Global Population

34. Thank You! Carl J. Dahlman Georgetown University carl.dahlman@gmail.com 202 687 8045