developing world does—more so than the traditional West.”
Despite its bright prospects to become the world’s economic growth engine, China probably faces some of the biggest hurdles to achieving that goal.
The country’s population will begin to age rapidly.
Whereas 8 percent of the Chinese population is now 65 and older, that figure will exceed 16 percent in 2030. Meanwhile, the proportion of China’s
population in the normal working years (15-65), which recently peaked at 72 percent, will decline to about 68 percent by 2030.
EMERGING MARKETS’ SHARE OF FINANCIAL ASSETS, 2000-2020
Percent
0 20 40 60 80 100
2020 2010
2000 35 34 19
11 10 9 14
27
29 24
22 9 9 17 3 19
5 3
US
Western Europe Japan
Other developed China
Other emerging
Source: McKinsey Global Institute, The Emerging Equity Gap: Growth And Stability In The New Investor Landscape (2011).
An economically difficult transition could mean an equally difficult political one in the case of China.
Slower per capita growth will increase the difficulty of meeting rising expectations, potentially sparking discontent. A political crisis would make it harder for China to meet its economic goals. A prolonged political and economic crisis could cause China to turn inward, blaming external forces for its problems at home.
Although the leadership and much of the middle class are now wedded to globalization because of China’s success during the past 30 years, suspicion of the outside world lingers and, similar to historical cases elsewhere, could reemerge as a powerful political force if Chinese economic development stalls.
The World Bank assesses that India will join China as an “emerging economy growth pole” by 2025, which could help to strengthen the global economy. India’s expected robust growth in the next 15-20 years means that its contribution to global growth will surpass that of any individual advanced economy except the United States. World Bank modeling suggests that together China and India will serve as nearly twice the engine for growth as of the United States and the euro zone combined by 2025.a
India, however, faces many of the same problems and traps accompanying rapid growth as China: large inequities between rural and urban sectors and within society, increasing constraints on resources such as food and water, and a need for greater investment in science and technology in order to continue to move its economy up a notch. India’s democracy provides it with a safety valve for discontent in a way that China’s one-party rule does not. At the same time, regional tensions between India and many of its neighbors could threaten India’s rise should such tensions explode in conflict and confrontation. As with China, a sharp economic downturn—particularly propelled by a political or military crisis—could quickly have broader regional and global effects.
India—in contrast to China—will remain a relatively youthful country, continuing to benefit from a
a See Global Development Horizons 2011: Multipolarity: The New Global Economy, The World Bank 2011.
or two. However, the slower growth will mean downward pressure on per capita income growth.
China’s per capita income in 2020 will have reached
$17,000 in nominal terms, whereas Brazil’s and Russia’s will be more than $23,000 and $27,000 respectively.
The G-7 economies are set to reach $64,000 per capita income (PPP) in 2020, more than three times China’s.
China faces the prospect of being trapped in
middle-income status. Many Latin American countries faced a similar situation in the 1980s and were unable to avoid the trap because of income inequality and their inability to restructure their economies.
Understanding that the Chinese economy is likely to slow, China’s leaders want to transition to a more consumer-driven economy and move China up the value-added industrial production chain. They are promoting S&T as the new economic growth driver, and China is already achieving progress in sectors such as nanotechnology, stem-cell research, materials research, and new applications of
existing technologies.
“India—by contrast—will remain a relatively youthful country, continuing to benefit from a demographic dividend.”
To achieve its goals, however, China will also need to develop its agricultural sector through establishment of fair and equitable land rights and build a banking sector that is more market-based and not geared to favor state-owned enterprises. There is also the question of whether a country can move to greater consumption if it does not have a social safety net.
In the last 20 years, opening up brought capital and technology to China, enabling domestic industries to catch up with Western companies. In the next 20 years, Chinese firms will probably need to go outside China to obtain the next level of technological and managerial innovation and sophistication. To do so, China will have to engage in foreign direct investment in other countries— a logical step at this stage of development and possibly the only way for China to move up the value chain.
infrastructure, housing, property, and manufacturing plants and equipment will raise global investment to levels not seen in four decades. Emerging market countries, with their faster growth rates and higher saving rates, will become the most important source of global finance, nearly doubling their share of the world’s financial assets during the next decade or so.
(See graphic on page 47.) However, the savings of emerging market countries may not be able to meet the increasing investment demands. McKinsey &
Company estimates that the gap between potential capital supply and demand will reach between $0.8 and 2.4 trillion by 2030. This gap will result in upward pressure on long-term interest rates, particularly in regions without adequate savings. Such a secular trend would have negative implications for investments around the world.
A MULTIPOLAR GLOBAL ECONOMY:
INHERENTLY MORE FRAGILE?
Some experts have compared the upcoming decline of US economic weight to the late 19th century when economic dominance by one player—Britain—receded into multipolarity. Other resemblances include
an accelerating globalization, rapid technological development, and growing geopolitical competition among the great powers. The late 19th century was a time of relatively high real economic volatility with wide fluctuations in growth rates. The average growth rate of the leading country, the United Kingdom, in the 19th century was not high, while the growth rate of the rival—the US—was higher but variable. Just as now, intellectual property rights were in dispute with no government in a position to enforce them abroad.
An added current complication are the differences over market liberalization and role of the state in the economy, which are likely to continue.
Other experts emphasize that the global economic system will become increasingly stressed. Up to now less than one billion people have accounted for three-quarters of global consumption; during the next two decades, new and expanded middle classes in the developing world could create as many as two billion additional consumers. Such an explosion will demographic dividend. The share of its population ages
15-65 will continue to rise from about 65 percent now to perhaps 69 percent by 2030. India’s declining birth rate combined with a greater proportion of dependent seniors will not begin to create an economic burden before 2050. Consequently, long-term forecasts show Indian economic power growing steadily throughout the 21st century and overtaking China at the end of the century because of China’s maturing age structure. To maximize its advantage from the greater proportion of youths, however, India will need to boost its educational system, both attainment and quality at lower levels; make substantial governance improvements, particularly in countering corruption;
and undertake large-scale infrastructure program to keep pace with rapid urbanization and the needs of a more advanced economy.
Both China and India are also vulnerable to the volatility in prices of key resources and to the potential early impacts of climate change. The Asian Development Bank indicated in a 2011 reporta that based on current trends Asia could become 90 percent dependent on imported oil by 2050. Rapid urbanization also enhances the vulnerabilities of Asian countries. Approximately 44 million people are being added to Asia’s urban population every year; by 2025, the majority of Asia’s population will be urban.
Currently many of China’s and India’s urban densities (unlike Tokyo, Seoul, and Singapore) are decreasing, creating urban sprawl, which is spurring growth in car ownership, higher energy use, and higher costs to provide utilities and transportation networks.
Food and water demands also rise exponentially with urbanization. Asian cities are vulnerable to the severe weather connected to climate change, which amplifies storm surges and flooding of low-lying areas.
This is particularly the case for many of these coastal cities: Kolkata (Calcutta), Mumbai (Bombay), Dhaka, Guangzhou, Ho Chi Minh City, Shanghai, Manila, Bangkok, Yangon and Hai Phong.
In light of these trends, emerging market demand for
a See Asia 2050: Realizing the Asian Century, Asian Development Bank, 2011.
late 19th century, a leading—though not dominant—
global currency (the dollar) may remain, but alongside others. The absence of a clear hegemonic economic power—as represented by an unrivalled global currency—could in turn add to volatility as in the late 19th century. The various players pursued their special interests with little risk of any enforcement of common rules by an overwhelming power.
Of course, the future will not exactly repeat the past: there are both reasons to believe that the global economy will be stronger than in the late 19th century and also situations in which it could become more crisis-prone. We have a stronger global financial system for dealing with stresses than we did in earlier eras.
The gold standard did not allow for a stabilization policy by central banks, accentuating the volatility.
Bretton Woods institutions (the IMF and World Bank)—which reduce the risk of spillover from fiscal and other crises—did not exist. However, the degree to which the emerging powers would view these originally Western-established bodies with legitimacy and deference in a full- scale economic crisis is unclear.
The current institutional framework is not likely to withstand the unleashing of a major conflict between the big economic players. Despite all the economic integration during the late 19th century Belle Epoque, the first globalization spurt was undone by the First World War and 1930s’ Great Depression. As we’ll explore in a later section, in the next couple decades conflict involving great powers is not inconceivable, but if such a conflict does occur, it almost certainly will not be on the level of a world war with all major powers engaged.
Finally, we are assuming that the new normal—albeit more fragile and volatile than the Great Moderation of the pre-2008 period—would be based on active support of the emerging powers. As described above, one could envisage mercantilist and protectionist pressures growing to break down globalization, particularly if coupled with rising political tensions with neighbors and rivals.
mean a scramble for raw materials and manufactured goods. With greater demand for products, economists worry that the number of bottlenecks will increase markedly and that supply of resources and goods will face at least temporary constraints. This could mean that the durations of business cycles will become significantly shorter and that they will be less smooth.
Competition over resources might lead governments to become increasingly involved in managing them, ramping up tensions with other countries vying for the same resources.