Structure of the Presentation 1. Brief Historical Overview 2. Present and Future Trends 3. Historical Experience of Power Shifts 4. Positive and Negative Impact for the World 5. Frictions 6. What Has to be Done? 7. What are some of the Longer term implications?

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

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

Historical and Projected Growth in Purchasing Power Parity

Historical Growth and Projections in Current US$

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

Rise and Fall of Powers Over Time Napoleonic Wars WWIWWI W W II Cold War Colonial Expansion European Powers

China SWOT Strengths Strong and capable government Large, growing unsaturated market Large skilled labor force Rapid increase in educational attainment Very high savings rate Rapidly increasing technological capabilities Strong manufactured goods exporter Strong military Weaknesses Natural resource poor Rising income and regional inequality Rapid deterioration of the environment Poor rule of law Real estate bubble Limited English ability constrain IT enabled service exports Opportunities Large investments in green technology may make it a market leader Development of strong service economy built on knowledge rather than natural resources Threats Global warming threatens drought and rising sea levels Risk of global protectionist backlash to its strong export orientation Risk of pushback from established powers to its rapid rise

India SWOT Strengths Increasing savings rate Strong rule of law on paper (but not so much in practice) Core of English speaking technical workforce Strong information enabled service export Young and growing labor force will give demography dividend if can be productively employed Weaknesses Weak coalition governments with limited capacity to implement change Corruption Natural Resource poor Weak physical infrastructure Very low educational attainment Weak military Weak and over bloated government Relatively weak technological capabilities Opportunities Strong potential to build on exports of information enabled services Strong need to strengthen education and develop stronger economic social system Threats Unstable neighborhood Global warming threatens drought and rising sea levels Risk of spreading Naxalite insurgence because benefits of growth have not trickled down to rural population Risk of water war with China

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

Contribution to Global Growth

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

5. Frictions 1. Trade 2. Resources 3. CO2 4. Geopolitical

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

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

Change in China’s Market Share in World (Four Global Markets by SITC Categories 6-8) DevelopedDeveloped AsiaDeveloping AsiaOther Developing % change % change % change % change 6: Manufactured goods classified by material : Machinery and transport equipment : Miscellaneous manuf. articles Total for All STIC Imports from China

Global Trade Imbalances Continue

Ten Largest Tertiary Student Populations 2007 CountryNumber Enrolled% of World Enrollments* China25, US17, India12, Russian9, Brazil5, Japan4, Indonesia3, S. Korea3, Iran2, Ukraine2,8191.9

The R&D Input Landscape

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,

Ecological Footprint of Ten Largest Users of Environment 2007 WWF 2008

Biocapacity vs Ecological Footprint-2007 U.S.ChinaEuropeIndiaRussiaJapanBrazil % of World Ecological Footprint % of World Biocapacity Net Position as % of World Biocapacity

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

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

Increasing Frictions Trade & Environment China and rest of world India and rest of world Between China and India Trade War Subsumes: -exchange rate -global imbalances -FDI -Intellectual piracy Friction because of China’s exchange rate undervaluation and large trade surpluses. Concern about China buying natural resources and technology firms. Extensive complaints about Chinese IP piracy. Not as likely as China since it has trade deficits. Like China, although Indian state-owned firms are not as active. Fewer complaints about IP piracy than with China. Compete in many product areas. May have diverging position s in Doha trade Some competition May become more problematic as they compete more in trade. Resource WarsPossibly over energy and resources, such as over islands in East and South China Seas. Possibly over energy in general, and water with neighbors, including China. Yes, especially over water from Himalayan Glaciers that feed main rivers in Asia Climate Change Not controlling emissions will lead to global warming Risk of geo-engineering attempts with unknown consequences if mitigation efforts fail China argues that it’s unfair to make it pay for CO2 since problem was created by earlier emissions of now-developed countries. China may go for geo- engineering if it begins to experience negative consequences of climate change. Same argument as China, plus the fact that it is smaller emitter and a poorer country. India may go for geo- engineering if begins to suffer costs of climate change. Perhaps, because China is already above global average per capita energy consumption and CO2 emissions, while India will be below global averages even up to 2035.

Increasing Frictions-Geopolitical/Security China and rest of world India and rest of world Between China and India Geopolitical Competition and Ideological War Note this is also over human rights, nuclear nonproliferation, and form of government. Yes with respect to Western democracies and Japan. Not so likely with Western democracies and Japan because India’s democratic government and market- oriented system are more consistent with those countries. Yes because of different ideologies combined with frictions on borders, water, and possibly trade. Security Conflicts Cyber warfare Military Conflict Hegemonic War Many current cyber attacks are traced to China. Possibly over Taiwan or other neighbors in South China Seas. China’s support of N. Korea is also a potential problem. Perhaps with U.S. in long term. India potentially has great capability in this area, but there is little evidence that it is active. Possibly with Pakistan because of old rivalries and unstable region. Less likely since India is ideologically closer to existing powers and not considered as big a security threat as much- larger China. Possible if frictions between them increase. Limited to border frictions in short run. Hegemonic war between them unlikely until both become dominant powers.

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

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

Integrated Global Economic System Fractured Global Economic System Environmentally Sustainable System Environmentally Unsustainable System 1. Current unsustainable state Moving toward protectionism, new financial crisis, insufficient technology cooperation, resource conflicts, negative effects of climate change, growing inequality. 4. Desirable state: Requires cooperation on trade, finance, technology, environment, security, increased aid for poor countries, and more sustainable development strategies. 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. 3. Alternative undesirable state: Protectionism slows global growth, increases poverty, ad hoc geo- engineering solution to climate change with unknown results. Alternative Scenarios

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

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

Changing Shares of Global Population

Thank You! Carl J. Dahlman Georgetown University