All together now
It is "synchronised", meaning every advanced economy has been sliding together, making it the worst year since 1945. Advanced countries will see their economies shrink by about 4 per cent in 2009. In contrast, some emerging economies, and in particular China and India, are steaming ahead. China recorded year-on-year growth of 7.9 per cent in the second quarter, while India, according to ING’s latest forecasts, will grow 6 per cent this year and nearly 7 per cent in 2010.
China’s growth, partly driven by a big programme of public spending increases, is starting to lift other economies, particularly in Asia. When G20 leaders gather in September in Pittsburgh for their third summit during the crisis, they will salute the efforts China and India are making to prop up the world economy. To many it may seem strange that China and India, who appear to be new arrivals on the world scene, are so important. China is about to overhaul Germany as the world’s biggest exporter and will soon overtake Japan as the second largest economy.
Back to the future
To economic historians, however, there is nothing unusual in this. China and India used to be the dominant players on the global economic scene. Calculations by the eminent economic historian Angus Maddison show that 2,000 years ago the two countries accounted for 59 per cent of the world’s gross domestic product with India as the senior partner with 33 per cent. At the time of the European renaissance, around 1500, China and India’s share was still about half of the global economy. They had large populations and relatively high living standards. Their importance only began to decline when they failed to respond to the European industrial revolution in the late 18th century.
Today, China and India have even larger populations; 1.3 billion in China and 1.1 billion in India, and they have rising living standards. This combination means their share of the world economy is rising fast. There is a good chance that by 2050 the three biggest economies in the world will be China, India and America.
What are the implications? It is easy to be fearful of the shift eastwards in the world economy and the danger that Europe becomes an uncompetitive backwater. There is, however, no reason to be so pessimistic. For business, the growth of China and India opens up enormous new opportunities and for investors it means the world economy will for the foreseeable future be stronger than it would otherwise have been. Economists often talk of big events as “shocks” and there is no doubt that the rise of China and India is a positive shock for the world. One eminent economist, Professor Richard Freeman of Harvard University, equates it to a doubling of the size of the global marketplace.
There are challenges as well as opportunities, notably handling the environmental impact of the economic rise of these two large-population economies. But we should be positive, not fearful, about this development.
By David Smith
Chief Economics Correspondent
Sunday Times, UK