Over the past 20 years, the emerging economies of ASEAN, the People’s Republic of China (PRC) and India (ACI) have enjoyed spectacular economic growth. Together they have tripled their share of global GDP measured on a purchasing power parity basis from 11.2% in 1980 to 31.3% in 2010. By 2030, based on current consensus forecasts, their combined share could reach almost half of world output. If these forecasts are correct, by 2030, Singapore will achieve United States (US) living standards, the PRC will be on the verge of developed country status (about 60% of US levels), and relative to the US, India should be just above where the PRC is today in per capita terms.
In 1963, US President John F. Kennedy said that ”a rising tide lifts all the boats. And a partnership, by definition, serves both parties, without domination or unfair advantage.” But has the rise of the ACI countries been good for the rest of the world? And how will the rest of the world be affected if consensus forecasts prove to be correct?
Alternative views on ACI growth
Over the past decade, developing countries outside the ACI have also enjoyed substantial growth, and while not without tensions, or concerns, their views of ACI growth are relatively benign. But not surprisingly given their economic problems, in the advanced countries, ACI growth is viewed with more ambivalence. The US public, for example, is primarily worried about jobs, and when emerging economies grow rapidly by exporting more manufactured goods (PRC) and services (India), they provoke concerns that they are creating unemployment and reducing wages. Several prominent economists have added to these concerns. Nobel Laureate Paul Samuelson suggested that Chinese growth could reduce US prosperity by lowering gains from trade, and Lawrence Summers, the former head of US President Barack Obama’s National Economic Council, argued that Chinese growth hurts the US by driving up global oil prices. In other parts of the world, the PRC’s emergence as the world’s largest exporter has also raised concerns about the ability of other poor countries to industrialize.
The key insight from classical economic theories is that Kennedy’s optimism is not necessarily warranted. The impacts of ACI growth on the rest of the world could be positive or negative, depending on whether it is biased toward exports or imports. Other countries could also be affected differently depending on whether their patterns of comparative advantage are similar (i.e., they are competitors) or complementary to the ACI countries. National income levels and endowments are most likely to distinguish winners and losers, and initially, natural resource producers and high-income countries are most likely to benefit (Robert Z. Lawrence 2013).
The experience of the rest of world has been mixed. Since the mid-1990s, ACI growth has improved the non-oil terms of trade of developed countries because, by and large, their exports do not compete head to head with developed country exports and they have reduced import prices of manufactured goods. Thus, contrary to the fears, their growth has raised incomes in developed countries. Trade with emerging economies has been found guilty of many outcomes for which it is not responsible. Many Americans blame the trade deficit for shrinking employment in manufacturing, for example. Trade has played a role, but automation and American spending choices are far more important factors. Many think trade with emerging economies will make Americans poorer because emerging economies have become more formidable competitors. But emerging country growth raises US living standards because most emerging countries are not (yet) major competitors for US exporting industries, and they sell US imports at lower prices (Lawrence Edwards and Robert Z. Lawrence 2013).
ACI growth has, however, put competitive pressures on other less-developed manufacturing exporters, worsening their terms of trade and constraining their pricing ability. Nonetheless, despite this competition, the non-ACI developing countries that are most reliant on manufactured exports have generally also experienced rapid growth over the past decade. Services exports, especially from India to developed countries have increased rapidly, but they remain modest in size relative to the markets they serve. ACI growth has also had a large impact on world commodity markets. This has been especially beneficial for oil and minerals commodity producers although this has raised concerns in some countries about the dangers of the “Dutch Disease” and appreciating real exchange rates. On the other hand, net food importers and oil importing countries have been adversely affected by high import costs.
How about the future?
With slow-growing demand in the advanced countries, the emergence of a large middle class in the PRC and India will drive global demand. In addition, global imbalances should unwind, albeit gradually, as developed countries increase their domestic savings to cope with fiscal deficits, while the PRC shifts its development path away from exports and investment led growth.
A key determinant of the impacts on the rest of the world will be the changing structure of PRC growth. The shift toward more consumption and less investment in the PRC could reduce the mineral intensity of its growth. This could offset some of the pressures on commodity markets from its higher income growth and the large infrastructure and construction and capital investments in many other emerging economies. In addition, as the yuan appreciates and PRC wages rise, opportunities will arise for less developed ACI countries (India, Indonesia, Viet Nam), as well as developing countries in other parts of the world, to attract global supply chains.
These same developments will move the PRC increasingly into medium and higher unit value exports. This could present more competitive challenges for upper-income developing countries and toward the end of the period, for developed countries. These could also remain difficult times for net importers of food and oil.
For each income group in the rest of the world, therefore, ACI growth provides opportunities and challenges. For developed countries the opportunities are for selling high-end services and capital and consumer goods in the ACI markets and enjoying the benefits from intra-industry trade; the challenges will come from increased head to head competition in manufactured goods and services that should become more intense toward the end of the period. For medium-income producers at 30% to 60% of US levels, there will be a tougher tradeoff between more intensive competition and serving the growing middle classes in ACI countries. For poorer countries, there will be greater opportunities for becoming part of global supply chains in manufactured exports.
All these projections need, however, to be taken with a grain of salt, and could well prove to be too optimistic. There are numerous risks to the outlook that could slow ACI growth. The most important questions relate to the sustainability of PRC growth, the ability of the developed economies to recover, and the possibilities of additional disruptions from financial and commodity markets.
Policy implications?
ACI countries can play a role, both individually and acting together, to enhance the benefits from their growth. In particular, they can generate opportunities for each other and for developing countries by reducing trade barriers that fragment their markets. The free trade agreements within the region should be deepened, and the barriers that constrain imports need to be reduced. In addition, just as foreign investors have played a key role in the emergence of the PRC as the world’s leading exporter, so can the PRC and other foreign investors assist low-income countries in the ACI and elsewhere do the same. Their role in developing manufacturing supply chains in Africa and other poor regions could be especially helpful.
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References:
Edwards, L., and R. Z. Lawrence. 2013. Rising Tide: Is Growth in Emerging Economies Good for the United States? Washington DC: Peterson Institute for International Economics.
Robert Z. Lawrence. 2013. Association of Southeast Asian Nations, People’s Republic of China, and India Growth and the Rest of the World: The Role of Trade. ADBI Working Paper. No. 416. Tokyo: Asian Development Bank Institute.
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