Extracted from Report of Development Prospects Group,the World Bank
In 1980, China and India accounted for 2 percent of globaloutput, and the remaining low and middle income countries made up 16 percent ofworld GDP. By 2005, the contribution of China and India nearly quadrupled to 7percent of global production, while the share of other developing countriesdeclined to 15 percent.
The growing importance of developing economies can thus belargely explained by the economic expansion of China and India. In the future, the increasing level of China and Indias integration with the globaleconomy, combined with sustained high growth, is likely to further cement theirposition as an important engine of global development.
An outstanding growth performance of relatively poor andhighly populated countries like China and India signifies a reduction in thenumber of poor around the world and a decline in global income disparities.
The World Economy in 2030
Developing countries will grow faster due to favorabledemographic and productivity trends. Measured at constant 2001 prices the global economy would reach $75 trillion in 2030 up from $35 trillion in 2005, anoverall increase of some 2.1 times. The developing-country GDP would jump from$8 trillion to $24.3 trillion increasing its global share of output from 23 %to33%
Developing countries will account for a largerportion of world output in the coming decade
The accelerated growth path of many developing countries isa consequence, of the combination of improved initial conditions, betterpolicies, demographic trends, and the still wide gap in productivityrelativeto high-income countries.
Over time, China and India played a major role in thequickening pace of growth in the developing world: the contribution of the twogiants to growth of low and middle income countries has increased from 45percent in the first period to 50 percent in the second. Over the next 23years, China and India are likely to account for 18% of growth in global outputand 46% of growth in real output of todays low and middle income countries.
Two significant demographic changes are occurring at the moment:
a) Virtually all of the increase in global population will be in developing countries, and
b) Todays high-income countries and China will become significantly older.
Changing demographics weigh heavily on the results influencing the growth of employment, demand trends, and changes in savings and investment behavior (and even productivity). The world will add 1.5 billion persons to its population between 2005 and 2030going from (about) 6.5 billion to 8 billion. Roughly 12 % will be living in high-income countriesdown sharply from the 18% in 1980 and 14.5% in 2005. Due to the differential in fertility rates, all but 40 million of this growth in population will occur in developing countries.
World population growth will be concentrated in developing countries in the coming decades
This disparity in population trends is also reflected in divergent paths for labor force and employment across developing and developed countries. Developed countries emloyment growth, though positive through 2010 at about 1.2 million new jobs per year, becomes negative thereafter, with an average loss of about 700,000 jobs between 2010 and 2015, jumping to an annual average loss of over 3.2 million between 2025 and 2030.6 Labor force growth is still rapid in developing countries - though on a declining trend throughout the period.
Per Capita Incomes Will Begin to Converge Across Countries
At todays income in PPP terms, the average developing-country resident receives about 16% of the average income of high income countries$4,800 versus $29,700 .This ratio would rise to 23 percent in 25 years time, representing an average developing-country income of $12,200 versus $54,000 for high-income countries.
There is great variance across countries. Chinese incomes would rise from 19 percent of the average high income level to 48 percent (in PPP terms), a significant narrowing of the gap, and would achieve an average income close to the lower range of todays poorest high-income countries. Per capita incomes in India are likely to rise much more slowly from 11 percent in 2005 to 17 percent in 2030due to faster population growth and more measured expansion in real GDP.
In some developing regions, per capita incomes will begin to converge with those in high-income countries
As average incomes of developing countries converge to OECD levels, demand for services in the developing world is likely to increase faster than in high income countries because services tend to have higher income elasticities than agricultural and manufactured products.
Some of this catch-up will be moderated by growing demand for health and public services by the aging OECD populations, but overall, faster growth in low and middle income countriesand particularly China and Indiais likely to translate into more pronounced shift of production towards service activities.
In order to accommodate this growing share of services in total output, the contribution of other sectors to aggregate production will decrease. For developing countries, the expansion is likely to come at the cost of agricultural output: Chinas agricultural output share is likely to decrease by more than one-half, while Indias agricultural production share could decline by one-third.
This is driven by sustained large increases in manufacturing productivity in both countries, which underpin their leading growth performance. The changing sectoral structure of Chinese and Indian economies is likely to have profound effects on factor returns. Because services tend to be more skill intensive than other sectors, increasing demand for services is likely to exert upward pressure on skilled wages.
In 2005, 79 and 91% of total skilled wage bill in China and India is paid to service sector workers, and these shares could rise further by 2030. Demand for skilled workers over the coming decades is likely to be particularly acute in China, where slower population growth will add to the relative scarcity of the white-collar employees.
Productivity growth, changing sectoral structure, and widening skill premiums lead to important changes in international competitiveness of developing countries. Low and middle income nations solidify their comparative advantage in exports of manufactured goods, which rise from 79 to 88 % of total merchandise exports between 2005 and 2030 .The trend is even more pronounced in China and India, which benefit from a TFP growth significantly above the developing country average.
In our scenario, 97% of Chinese and 98 % of Indian merchandise exports are likely to originate from manufacturing sectors. As high income countries lose competitiveness in the manufacturing sector due to their lower productivity, the share of manufacturing products in their total exports is likely to decline significantly. Manufacturing sectors, these linkages are likely to become even stronger in 2030.
Slower growth in China and India: consequences for the global economy The pace of growth in China and India over the next 25 years is likely to significantly outpace the growth in the rest of the developing world. In this simulation, Chinas 2005-2030 real GDP growth declines from 5.8 to 5.2 percent, while that of India is reduced from 4.9 to 4.4%. World GDP growth over the same period declines by 0.06 % per year; this effect is mostly driven by a reduced contribution of the giants to global output (direct effects).
The indirect effectsspillovers to other countries through changing trade patterns and world priceshave only minor impacts on real GDP. The main reason for this result is that the growth process is determined by accumulation of labor and capital, and TFP improvements. Slower growth in China and India does not have an impact on labor force growth or capital accumulation in other countries, and affects TFP only marginally through reduced openness.
However, effects on consumption are more pronounced. Global Income Inequality If the world were a single country, it would be one of the worst distributed. The fact that global inequality is higher than the inequality level within most countries is explained by disparities in average incomes between countries.
This is also clear from the results of two different population decomposition exercises: (1) defining the subgroups as countries, and (2) defining two subgroups, China and India versus the rest of the world. In other words, eliminating all within-country income differences would bring global income inequality down by 25 percent. In a second exercise the worlds population is partitioned in two subgroups, one containing the populations of China and India and the other one with citizens from the rest of the world.
This decomposition shows that in 2000 comparing average incomes of the China and India group with average income in the rest of the world (RoW) would be enough to capture 18 %of total income inequality. The importance of China and India gets much larger when considering changes between the 2000 and 2030 global distributions. By 2030, the Gini for the global income distribution is 5 points lower than its level in 2000.
According to the decomposition results, the reduction in inequality between 2000 and 2030 is entirely accounted for by a reduction in disparities in average incomes across countries. Since reductions in average incomes differentials are weighted by population, a rapid growth of poor countries like China and India can have a great impact on global inequality.
The Emergence of the Global Middle Class
According to our baseline, in 2030, 16.1 percent of the world population will belong to what can be called a global middle class, up from 7.6 percent in 2000. This large middle class will create rapidly growing markets for international products and servicesand become a new force in domestic politics.
The total increase in the global middle class is explained by:-
(1) Population growth rates of cohorts within this class that are above the world average and
(2) By higher economic growth rates in developing countries which pull their citizens out of poverty and into the global middle class. The population growth rates of households within the global middle class (as classified in 2000) was relatively low with an average rate of 18 percent over the entire period, as opposed to the world average of 32%. Therefore, the great majority of the increase in the global middle class is explained by high economic growth rates taking place in developing countries.
Chinese and Indian weight in the global middle class
The global middle class divided into citizens from China, India and the rest of the World (RoW). In 2000 only 13.5% of the global middle class were Chinese nationals and no Indians belonged to this group By 2030 citizens from China and India had a combined shared of 44% of the global middle class, with the great majority (38%) being Chinese, in fact half of the total 740 million new entrants into the global middle class will be Chinese nationals.
The importance of China and India in the global middle class will depend on their economic and population growth rates and the changes in their within-country income inequality In fact, due to the relatively unequal distribution in China; its richest citizens could be part of the global middle class in 2000.
By year 2030, after several years of growth rates higher than the world average, China becomes the country that accounted for more global middle class members, hence reshaping the global distribution. Nevertheless, given that the thresholds defining the global middle class are absolute values, Indias growth also results in an increase in the global middle class.
Indias entrance into the global middle class is also partly explained by an increase in Indias income inequality, expanding the upper tail of its distribution further to the right along the global density. This increase in income dispersion helps the richest 5 percent Indian citizens enter the global middle class. Growth in China and India and, to a lesser extent, changes in their within-country inequality will have as an effect a tremendous increase in the global middle class resulting in a substantial improvement in global income inequality.
The Consequences of a Growing Global Middle Class The ascent of hundreds of millions of Chinese, Indians and nationals from other developing countries into the global middle class will produce a large group of people in the developing world who can afford, and will demand access to, the standards of living that were previously reserved mainly for the residents of high-income countries.
This may have two major implications:
a)The demand for international goods and services will rise, and
b) Pressures for policies that favor global integration will increase.
Conclusions
Thus, the results under the baseline scenario show that, between 2005 and 2030, global GDP more than doubles, with China and India accounting for a significant share (18%) of global expansion. In terms of income per capita, in 2005 the average Chinese had an income 1/5th of what the average citizen of a high-income country would earn and, by 2030, this gap narrows to almost one half. Due to faster population growth and more measured expansion in real GDP, per capita incomes in India are likely to rise much more slowly than in China, catching up from 1/10th of average incomes in rich countries in 2005 to less than 1/6th in 2030.
This strong economic expansion of China and India also explains two key features of the evolution of the global income distribution in the next 25 years:
- A reduction of global inequality and
- The emergence of a large global middle class.
From a global inequality perspective, the very populous and initially poor countries (China and India) are growing at a rate above that of rich countries. In an era of globalization, global inequality has become more policy relevant. Through easier international movement and communication, citizens in individual countries are more aware of the (economic) situation in other countries and this enhanced awareness is behind emerging political demands (for a more equal global income distribution).
However even though changes between countries explain a lot of the change in the aggregate index, a lot is also happening within countries. These changes of income distribution at the national level are still crucial for domestic policy and growth prospects of individual countries.
Source: AEPC Weekly
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