India, bigger than the UK now
View(s):India is now bigger than the United Kingdom. Well, we know that we are not looking at the geographic or demographic size of the country, but its economic size. According to the World Economic Outlook 2019, this year India with little less than US$ 3 trillion GDP is going to surpass the UK economy with US$ 2.8 trillion GDP.
This is another turning point in the dramatic shift in world economic power. With this change, India will be identified among the top-5 biggest economies in the world which produce more than half of the world GDP. Other countries among the top-5, at the moment, are the US, China, Japan and Germany.
According to 2018 data, the US accounted for 24 per cent of world GDP, and China 16 per cent. The GDP share of Japan and Germany in the world economy are 6 per cent and 5 per cent, respectively, while the UK’s share was 3 per cent. There might be some other emerging countries in the world, which would surpass some of these top-5 countries in the future.
India is the second Asian country to enter the top-5 biggest economies in the world pushing the UK out of that group. Before India, it was China which entered the top-5 in 2005, surpassing France which was in that position. Then China overcame the UK in 2006, Germany in 2007, and Japan in 2010, and became the second biggest economy in the world. As per the shift in the world economic power, China is also due to become the biggest economy in the world, ousting the US from that position.
India together with China, we now have two biggest Asian economies in the group of top-5 economic giants in the world. I thought of looking at this story today, to discuss the fascinating global economic transformation: That is the shift in global economic power.
Shifting economic power
About 200 years ago, the world economic power was with the UK. Industrial and agricultural transformation as well as international trade expansion first took place in the UK leading to world economic power concentration in the UK. About 100 years ago, the world witnessed the shifting of economic power from the UK to the US. The UK’s economic supremacy was lost against not only to the US, but also to Germany and Japan.
Japan surpassed both the UK and Germany, and became the second largest economy in the world after the US. In terms of per capita income, it actually surpassed the US too; by the mid-1990s, Japan’s per capita income was almost 50 per cent higher than that of the US. But Japan entered into a long economic recession, and gradually lost its economic supremacy.
Within the global economic set up, the economies of the countries or regions grow, come to maturity, start slowing down, and plunge into recessions; at the same time some others are seen, making their way forward. All such changes in the world economic order are due to valid economic reasons, internal or external – the reasons that cause the ups-and-downs of the global economy.
Capital outflows
There is an interesting economic phenomena in the world’s ups-and-downs cycle: During the period of recessions, investments get relocated through foreign direct investment (FDI) outflows. As the economies of advanced countries began to slow down after the 1970s, making the way towards 2008 financial crisis, the FDI outflows also started to accelerate. Before 1987, global FDI outflows amounted to less than US$100 billion; after 1997, they grew over $500 billion; over the past 12 years after 2007, they remained around $1,500 billion on average.
These FDI outflows were basically from the advanced countries, including the US, Japan, and the Western European countries. Traditionally, the FDI flows were a business of the rich countries within themselves; they originated from the rich countries and were destined to the rich countries. This pattern, however, changed, as the new FDI flows increasingly flowed into the developing countries, and many of these developing countries were emerging economies in Asia.
French President Emmanuel Macron welcomes Indian Prime Minister Narendra Modi for a meeting at the Chateau of Chantilly, near Paris, France August 22, 2019. REUTERS/Pascal Rossignol/Pool
The same coin
The FDI outflows produced two types of results as the two-sides of the same coin: Firstly, the FDI flows came out of the economic recession, by making the economic downturn even faster. Advanced countries started losing the output resulting in a slower economic growth. Consequently, people lost jobs and their incomes too.
Secondly, the outgoing FDI flows found new locations in emerging economies in Asia. They increased the output in emerging economies by accelerating their growth rates. And people in these countries received jobs and incomes.
When the advanced countries were reporting slower or even negative growth rates over the past 10-20 years, the emerging economies in Asia reported comfortable economic growth. The countries that were prepared to welcome the FDI flows were growing fast and benefitting the most.
Stolen jobs
This is really the Asian Century of emerging economies. In spite of its underlying harsh economic realities in advanced countries, from a different point of view, it was also known as “stealing from advanced countries”.
The US-China trade dispute was basically a dispute of “stealing” by China from the US: According to a study by the Economic Policy Institute, China has stolen 3.4 million American jobs during the period of 15 years from 2001-2015, and caused a massive trade deficit. How did it happen?
The manufactured products – particularly electric and electronic items, which were originally produced in the US – are now produced in other emerging economies such as China, perhaps by the same companies. As these companies shifted their production to emerging economies in Asia through FDI outflows, the US lost their production as well as jobs.
Moreover, instead of exporting these products, now the US has to import them, resulting in a growing trade deficit. The US-China trade dispute as well as rising protectionism in advanced countries is an attempt to halt the global shift in production.
Pulling down Brexit
India is now the second largest FDI-recipient among developing countries, after China. Last year, India has recorded $42 billion FDI inflows. The size of FDI inflows is not related to the size of the country, anyway; Singapore has attracted $77 billion.
In the recent past, India has also seen its GDP growth accelerate to around 7 per cent a year. At the same time, the UK growth rate was slowing down in the past few years to just above 1 per cent a year. In fact, the Brexit and its related uncertainty has caused a further slowdown in the UK’s economic growth. It is clear that Brexit has made the economic slowdown even faster by pushing the UK economy out of the group of top-5 largest economies in the world. The flip side of Brexit is, therefore, interesting; it has permitted India to an early check-in to the position vacated by the UK.
Political fatalism
India has already refuted economist Raj Krishna’s notion of the Hindu rate of growth; countries with religious fatalism and contentedness are unlikely to grow at higher rates.
India is about to demolish even a more powerful notion of political fatalism: “Democracies cannot have a higher growth”. By this notion, the countries which sustained higher growth were far from democracies at that time. In the latest case however, the world’s largest third world democracy is heading into the group of top-5 biggest economies too.
By the way, India has a big vision, as declared in Prime Minister Narendra Modi’s Election Manifesto: “By elevating to a US$ 5 trillion economy by 2025, India has set out its roadmap to be the third largest economy in the world”. This means that within the next five years India will also line up after the US and China, by surpassing both Japan and Germany. Apparently, it is not impossible.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk)