Sunday, October 12, 2003
World tilts towards the east
Posted by David Smith at 06:27 PM
Category: David Smith's other articles

British workers, it seems, are facing a two-pronged assault from thousands of miles away. China is mopping up manufacturing jobs while India is claiming increasing numbers of those in the service sector. Soon, to listen to some of the gloomier prognostications, we will be no more than a skeleton economy, musing on past glories.

I don't want to dismiss the threat to jobs from low-cost countries, but it is hard to square it with record levels of employment in Britain. Not only that but such shifts are part of the process of economic development. And moving low-skilled work to cheaper regions is of substantial net benefit to the British economy.

The focus on China and India does, however, throw up some interesting questions.

Now that these economies seem to have discovered the elixir of growth, how big is the potential? How long before China becomes the biggest economy in the world, or India becomes bigger than any of Europe's economies?

These are plainly important questions for business, which needs to know where the markets of the future are going to be. But the growth prospects of countries like China and India also throw up bigger questions. To what extent, for example, will these countries play by the western rules on environmental and other matters? And how, having been used to playing second fiddle, will they use their new-found economic power?

Goldman Sachs has projected the evolution of the four biggest, fastest-growing emerging economies - Brazil, Russia, India and China, which they call the Brics - in a paper by Dominic Wilson and Roopa Purushothaman entitled Dreaming with Brics: The path to 2050. This is not, it should be said, merely a straight-line exercise based on extrapolating recent growth rates. The projections are on the basis of a growth model that incorporates elements such as population change and technical progress - the rate of catch-up with advanced economies.

It is also assumed that these economies "do the right things" by running sound macroeconomic policies, having strong and stable political institutions, maintaining an openness to trade and foreign investment and continuing to invest in raising educational standards.

There is also a currency element to the projections. A current bone of contention is the determination of the Chinese authorities to stop their currency, the yuan, rising against the dollar. In the long term, says Goldman Sachs, the currencies of all four economies will rise.

So what happens when all these assumptions are put into the mix? Concentrating on China and India, the two biggest, the first result is that Britain will not be the world's fourth-largest economy for long.

China's gross domestic product overtook Italy's two years ago. It will exceed France next year, and the UK in two years. Germany will be picked off in 2007, Japan in 2016 and finally America in 2041.

This is not, it should be stressed, based on China growing at its present 8% rate for half a century. Growth is assumed to slow gradually to about 3% and the average over the 50-year period is slightly under 5%. Even so, this would be enough to ensure that by 2050 China's economy is 25% bigger than that of America.

The long-term prospects for India, admittedly from a lower starting point, are, if anything, better. Its 50-year growth rate is put at just above 5%. It will not overtake America over this period but will become a bigger economy than Japan, and thus the third biggest behind China and America, in 30 years.

In one sense these economies with their massive populations - 1.3 billion for China, 1.05 billion India - will not become richer than the west. Even by 2050, China's projected GDP per head will be only half that forecast for Britain, and less than 40% of America. India's per capita GDP will be less than 30% of Britain's and 20% that of America.

Unmistakeable though the catch-up is (Chinese per capita GDP is currently less than 3% of America's) closing the gap will take many decades beyond 2050. By the same token, these countries will retain labour-cost competitiveness for many years to come.

While westerners will remain richer for the foreseeable future, though, the story of the 21st century is going to be one of a marked shift of economic power to the east.

The European-dominated Group of Seven - America, Japan, Germany, Britain, France, Italy and Canada - will have to change its membership or look increasingly irrelevant. Other international bodies will have to tilt towards the east.

More important than that is the emergence of new drivers for the world economy.

Much of the focus of the long-term economic debate has been how demographics - stagnant or declining populations - will slow the global economy. The message of these projections is that there will be another important source of global growth and that, if anything, prospects for the next 50 years are better than the past 50.

America, with its Pacific coastline, is well placed to cope with this tilting of the world's economic axis. Despite the problems in California, Arnold Schwarzenegger may be taking over at the right time. Whether Europe can rise to the challenge or be content to grow old gracefully is the big question for Britain.

PS: The Bank of England left the base rate unchanged at 3.5% on Thursday, despite one or two worries that the monetary policy committee (MPC) would spring a surprise increase. Weak industrial production figures argued strongly against a rise. Judging from the number of mid-season sales that retailers are holding, shop spending is not soaring away either.

This brings me on to my search for reliable informal economic indicators. The response has been gratifying. One useful measure is thoughtless or irritating behaviour. The more other drivers cut you up or other passengers engage in David Brent-style mobile-phone conversations on the train, the faster the economy is growing. On the other hand, if it's easy to get a babysitter, we are in a slowdown.

Builders are a good bellwether. One reader does a white-van count around the cheaper hotels in west London, a reflection of the number of out-of-town builders doing work in the capital. Another can gauge the strength of the oil industry by the number of flashy cars parked in his Aberdeen street.

A good general guide to the state of the economy is provided by the number of businesses being put up for sale or auction by receivers. So is a favourite of mine, the size of this newspaper's appointments section. A long-standing pointer to the City's fortunes is the amount of queuing for the "drain", the Tube line linking Waterloo and Bank, traditionally the politest part of the underground. It has been quiet but has recently become busier.

I have been sent a variety of industrial indicators, including demand for tungsten carbide drill tips. When that turns down, so does the economy. As the party-conference season ends, I can pass on a political one - the more the opposition talks about the economy, the worse it is doing. That's like the 10 O'Clock News test: economic stories only make it if they are grim. Keep them coming.

Finally, without wanting to over-personalise things, I have been sent by another David Smith an American cutting about an event, "Celebrating David Smith", in which all the David Smiths in Vermont were invited to a "corn roast and community pot luck dinner". It sounds like quite a night and set me thinking. Harness the economic power of all these Smiths and we could take on the world.

From The Sunday Times, October 12 2003

Post a comment

Remember personal info?