Differing views of the world

The government was right to go to India to carve out a new relationship based on the changing balance of economic activity and power in the world.

The world Stock market index still reflects the world as it was in the last century. The USA is dominant at 42% of the total, the EU next with 27%, whilst China has just 2% of the total value and India 1%. This is the comfortable world of old fashioned diplomats, who want the UK to cosy up to the US superpower in a special relationship, and strengthen her links through the EU with the continent.

It is a very different world from the one we see based on population. China with 19.5% of the world’s people and India with 17.3% each dwarf the USA with 4.5% and the EU with 7.3%. Both India and China have more people each than the total in both the USA and the EU . Taken together, India and China have three times as many people as the USA and the EU combined.

As the Indian and Chinese economies grow at three times the rate of the EU and USA, their GDPs are catching up fast. All the time most of the people in these two large countries were poor, and all the time China was an inward looking communist state keen to keep out western influences, the west could proceed on the assumption that it was dominant. Today it looks very different.

At current exchange rates the US accounts for 24.6% of world economic activity and the EU 28.3%. In contrast China commands 8.3% and India just 2.1%. In conventional GDP terms the USA and the EU still account for five times as much world output as China and India.

However, if you examine the origin labels of products in many shops in the UK today, you get a rather different feel. So many of the products have made in China or other parts of Asia on them. You have to ask, do these overall output figures reflect accurately the new reality? Attempts to allow for different price levels and for undervaluations of eastern currencies produces so called purchasing power parity figures for world output. In these figures the US has 20% of the total, the EU 21%, China 13% and India 5%. These are nearer to the truth, with India and China approaching half the level of output of the USA and the EU. In some industries China is now dominant, and determined to achieve the same in a range of other areas where the west and Japan were once unchallenged.

My feeling is that India and China will continue to outpace the west and these figures will continue to change rapidly in their favour. That is why we need to reorient our economic and diplomatic thinking. Asia has the people. She now has a lot of the world’s money. Europe is mired in slow growth and population decline. The future lies in the east.

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31 Comments

  1. Posted August 6, 2010 at 8:02 am | Permalink

    China and, to a lesser degree, India have the growth and money, but not the consuption. They are using the money to buy up assets in other countries rather than spending it making their own population richer.

    The UK too has spent money investing in assets in other countries. We have a surplus from investment income in foreign assets that is not measured in GDP but is measured in GNI (Gross National Income).

    Are there any figures for GNI for these countries to go with the GDP figures? It would be interesting to see how fast they are becoming global economic power houses outside of their own industrial production.

    China and India are starting to show global muscle in core industries like Steel. Even in my high tech/creative industry (video games) both China and India are starting to invest in western companies using profits from their domestic markets.

    There is a risk to our long term economic well being in these growing countries using their profits to own the industries of the west as well as supply all of it's manufactured goods. Something else to watch out for as the world changes.

  2. Posted August 6, 2010 at 8:16 am | Permalink

    It certainly feels like that out there. Three of my children now live in the East. One, mired in poverty and unemployment, lives here desperately trying to bring up a family of three. Yesterday a teenage grandson was given £50 to buy a new jacket in Top Shop. He then came back for more and was given £10.
    But, honestly, would you like to live in Saudi? Or Bangkok, permanently? Or China? And why are the Indians and Pakistanis and Banglas all so very eager to live anywhere else than where they were born?

  3. Stuart Fairney
    Posted August 6, 2010 at 9:40 am | Permalink

    With an educated workforce, available banking system, moderate infrastructure and commercial tradition, Europe need not be stuck in the slow growth lane, so why is it?

    Citing Labour costs is only a smalll part of the picture. Granted, low skill manufacturing is all but over in the rich developed arts of the world, but why else are we so slow to grow?

    Over-taxed and over-regulated economies limp along, just as we are doing, so just cut taxes and government to Chinese levels and watch us achieve Chinese growth levels. Come on JR, you know this to be true so why not say so?

  4. Javelin
    Posted August 6, 2010 at 9:58 am | Permalink

    John, whilst it is true growth will come from the East I don't believe that reflects power or profits.

    Profits stays with wealth and assets.

    I don't believe India has the necessary structure to support sustained growth. Esp fiscal infrastructure. In India 90% of people don't pay tax. This is worse than the situation in Greece.

    The problem with China is that it is a country of single children. Controlled by a state who doesn't let foreign countries make a profit. They will let you cuts costs but not make profits.

    • Stuart Fairney
      Posted August 7, 2010 at 8:20 am | Permalink

      You seem to think that government taking people's money is a necessary pre-condition for growth when in fact it is a handicap to said growth.

  5. Adrian Sells
    Posted August 6, 2010 at 10:06 am | Permalink

    I think the facts are pretty compelling, as you point out. The one thing that worries me about the consensus view that the future lies eastwards is that it is just that – a consensus, and consensuses often don't work out in quite the way people expect.
    The worrying factor in this case is surely that while economic strength is increasing out east, military strength (at least in terms of technology and sophisticated armaments) remains concentrated in the west, particularly the US. Add to this the fact that China remains an undemocratic and politically authoritarian state unacceptable to many in the free world and you have the seeds of future conflict. History suggests that one empire does not cede power to a new one without a fight.

  6. Bill
    Posted August 6, 2010 at 10:53 am | Permalink

    It may be in the east, but India is no China or Singapore, or Korea

    India is a difficult country to export to – in my experience.

    Documentary letters of credit are sometimes difficult to get confirmed. It(can be difficult persuading officials to attend to documents-ec)

    You can have drawfulls of enquiries and make a lot of trips to little avail and then you get beaten down on price.

    It is a different way of doing business, again in my experience. Thats maybe why our exports to the sub continent are so low.

    It’s all very well that there’s a huge and growing population but most of them, sadly, have nothing.

    It’s easier to focus on different parts of the world.

  7. Geoff not Hoon
    Posted August 6, 2010 at 11:00 am | Permalink

    Mr. Redwood, as well as population decline we could add a rapidly ageing population with all the problems that brings economically. Some futures may lie in the east but somehow the west will have to face up to the facts you list and decide positively how to react rather than letting decline and decay take hold as is already evidence in so many cities in Britain.

    • Mark
      Posted August 7, 2010 at 3:33 pm | Permalink

      Try looking at China's demographic projections. The "one child" policy has real implications. Add in rapidly rising longevity as health care improves.

  8. Acorn
    Posted August 6, 2010 at 11:09 am | Permalink

    Population decline; yes please. Alas, not much chance. A man on the radio said, seventy percent of the western world's arable crops goes to feed animals that we eat. You get about one kilo of beef for ten kilo of arables. Not a lot of people know that.

    As things are a bit dull at the moment JR; I think you should do a modern economic appraisal of that classic film "Soylent Green" (get-it?). Particularly as my body is being secretly trained – by the government – to absorb cloned meat from cloned cattle reared, no doubt, by a cloned farmer; I think we should be told!

  9. DominicJ
    Posted August 6, 2010 at 12:44 pm | Permalink

    I would change only one thing.
    The US has been steady at 25% of world GDP (with the odd exception) since about 1950.

    EUrope 27 were as high as 38% as little as 30 years ago, we've lost more than 3% of world GDP in the last decade alone.

    Its not so much an unchallenged rise of Asia as it is an insane collapse of EUrope

  10. EJT
    Posted August 6, 2010 at 12:49 pm | Permalink

    I'm sure diplomacy is jolly good stuff. But wouldn't the real message from these facts be that we need to take aggressive actions to up our game industrially and economically ?

  11. forthurst
    Posted August 6, 2010 at 1:23 pm | Permalink

    I certainly agree that politicians should more look to the future in terms of the consequences of their actions. That obviously means first of all not asking the USA who are friends or enemies are and secondly continuing to try to sustain economic relationships founded in relative economic decline.

    If Cameron went to India to try to make it a little easier for our few great remaining trading companies to operate behind India's tariff and legal barriers to fair trade so much the better; as it is companies like Tata have grown to a considerable size based rather more on the basis of those protections than that of their engineering excellence whilst at the same time being able to enter the UK taking over engineering enterprises without let or hindrance with the option to close them down and move production to India or elsewhere.

    The consequences of permitting the third world to stream into the country without check, whilst permitting countries like India to asset strip our few remaining industries will inevitably lead to the this country becoming a balkanised third world geographical region within the EUSSR since we will have totally lost the will or the ability to create a different future for ourselves.

    I believe the future belongs to China because, they are not only very populous, but they are at least as intelligent, on average, and probably more temperamentally stable than we are, whereas those from the Subcontinent are signifactly less so. Historically, China was cultvfating rice 2000 years before the Middle East and in 1830 controlled a third of world trade, since which it has suffered the direst consequences from civil wars and the most malevolent despot in history.

    • Posted August 7, 2010 at 3:14 am | Permalink

      Can you be more specific on the tariffs. Surely India is in the WTO so there should be no one way tariffs. Maybe we import services from India and manufactured goods from China.

      • Mark
        Posted August 7, 2010 at 3:36 pm | Permalink

        I imagine that in India they have their own way of complying with WTO directives. Think of the French ruling that required all imported video recorders to pass through a special customs unit in Poitiers and you'll get the right sort of idea.

  12. Freeborn John
    Posted August 6, 2010 at 1:28 pm | Permalink

    There’s little doubt in my mind, based on personal travel in India, China and other Asian countries that the GDP per capita numbers on a PPP basis are about right. Which is to say that India is an economy of roughly the size of the UK’s, though far poorer per person and with most of even the new infratsructire (barring one or two excpetions like the new metro in Delhi) being substandard. China is a different matter entirely with massive amounts of high quality infrastructure going into the ground and an economy second only to that of the USA.
    Given the trends, there is also no doubt in my mind that the foreign policy goals outlined last year by William Hague are appropriate given the world that is taking shape. One thing i disagree with though is the implicit assumption behind much media coverage in the last week or so, that a ‘special relationship’ with India should be at the expense of its neighbours like Pakistan. That makes no more sense that downgrading relations with Canada simply because of the good relations we enjoy with Washington. It does remain the case that India is a larger economy and a more stable democracy than Pakistan, Bangladesh or Sri Lanka and deserves to be centre stage but we can expand trade with other countries in South Asia at the same time, hopefully encouraging stability and good governance in the Muslim countries with beneficial consequences for our own security.

    We need to stay clear of the notion that a ‘special relationship’ means automatic alignment on the interests of any one country or set of countries at the expense of systemically subordinating our own national interest. We have to avoid becoming needlessly entangled in regional squabbles between others that we have no real interest in our self. That is the path that led to poodle Blair and the subordination of our law to the general European interest as perceived by Brussels and which could lead to global governance in smoke-filled Councils or world federalism.

  13. Steve
    Posted August 6, 2010 at 1:56 pm | Permalink

    It is and will be all about growth rates. I live in Thailand, and the revised 1H10 figures suggest that GDP grew at a 10% annual rate – and that's in spite of the collapse of tourism caused by the troubles in Bangkok. 2H10 promises to be even better. I saw in the Bangkok Post today that even Indonesia is managing 6.5% growth. Never mind China and India and their 8%-11% growth rates. These economies desperately need to grow as they still have so many poor people, and everyone should applaud their achievements. Look at the picture in the West, though, (and the extreme east – Japan) and the developed, rich economies are struggling to deliver much in the way of growth at all. I am sure that there are valid reasons for this – excessive government, excessive red tape, excessive employment laws, excessive HSE, and so on, not to mention the current demographic outlook. To me, the real question is: why does the West want to become ever 'richer'? If we simply used what we already have efficiently there would be very few problems, but we squander so much unnecessarily. I'm very happy to see the poor countries of east, south-east and south Asia growing so rapidly. I don't really feel that the EU needs to follow the same path as an incredibly rich and developed part of the world. Dear God, the USA already consumes 25 million barrels/day of oil – imagine what would happen if THEY were growing at 10% per annum? I could ramble on all night, but my point is that we are already rich enough – let the poorer nations have their turn and be content with what we have – but learn to use it properly, not to allow wastrels like Gordon Brown to throw it all away on party political agendas.

    • Stuart Fairney
      Posted August 7, 2010 at 8:22 am | Permalink

      Speak for yourself, I am NOT rich enough!

    • Alan Jutson
      Posted August 7, 2010 at 9:27 am | Permalink

      Steve.

      Most of us are now getting poorer as the Government takes an even larger share of our earnings, and inflation starts to take hold.

      With the cost of energy about to rise substantially, along with foodstuffs, water rates, and council tax, you will need even more money to just to simply exist in the future.

  14. Paul B
    Posted August 6, 2010 at 6:23 pm | Permalink

    The BoE seem determined to keep inflation high. This will translate into higher wage demands?

    We've still got too much debt, house prices are still to high, travelling (to work) is too expensive, food price inflation is taking hold. Again, upward pressure on wages.

    Good question Mr. Redwood – how on earth are we going to compete with economies of the East?

    But it's the weekend. Let's not get too depressed.

  15. Alan Wheatley
    Posted August 6, 2010 at 7:11 pm | Permalink

    Ah yes, the East. With our historical links to many countries to the East right the way to Australasia, supported by friendly Commonwealth relations, this is indeed a good direction for an World trading country like the UK to be looking.

    Shame about the EU millstone round our necks.

  16. John McEvoy
    Posted August 6, 2010 at 9:19 pm | Permalink

    John, absolutely correct. So what approach have our leaders taken? Mire the economy in regulations, taxes and levies for stupid windmills; employ hundreds of thousands of bureaucrats on lavish packages – then sit back and watch the ship slowly sink under the sheer weight of it's passive, non-paying cargo. But the general population – thanks to the internet – are getting the idea and are ready to throw off the government yoke.

    • Stuart Fairney
      Posted August 7, 2010 at 8:24 am | Permalink

      But how when all major parties are statist*? The minor parties get no serious media air time and when they do appear they are just mocked, so where does change come from?

      * Don't even tell me the conservatives aren't JR after Teresa May's shameful actions recently

  17. zorro
    Posted August 6, 2010 at 10:56 pm | Permalink

    We need to focus on trade with all nations but until we disassociate from the EU, trade freely, govern ourselves, re-educate and train our people properly, and stop the insane social welfare spending, we will continue to lag behind.

    John,
    By the way, have you been on holiday in the Scilly Isles recently? My wife insists that she saw you in Hugh Town on St Mary's last week. I assume that if you were there, it was purely a holiday and not a pilgrimage to see Harold Wilson's resting place. Either way, she seems sure and will only take your word for it. She has a variable track record in recognising faces which is in no way reflective of her working for the UK Border Agency……

    Thanks
    zorro

    Reply: Yes, I have had a holiday in the Scillies.

  18. Ex Liverpool Rioter
    Posted August 6, 2010 at 11:59 pm | Permalink

    http://www.liverpoolecho.co.uk/liverpool-news/loc

    I think there IS some room for cuts after all John!
    Mike

  19. Norman
    Posted August 7, 2010 at 12:16 am | Permalink

    We desperately need to export progressivism to the East. If they continue on their capitalist course, and we continue on our politcally correct progressive course, we are doomed.

    Our only hope is that they embrace the madness we have embraced for the last 40 years. For the love of all that is Holy, send as much Labour politicians East as possible. Tell them (the East) that these are the people who caused the Rise of the West, and their naysayers the Fall.

    Neil kinnock would make an excellent Ambassador to China. Will he give up his EU post (and pension rights) to go there? please ask him. His Country Needs Him (insert pointy finger here).

  20. austin
    Posted August 7, 2010 at 12:58 am | Permalink

    Neither India, nor especially China, have the economic systems to efficiently allocate capital; the free enterprise system. China remains a deeply fractured country with two main languages and a sharp wealth divide between the coastal region [where all the money is] and the much more impoverished inland areas. China is also an increasingly belligerent power that may well overplay its hand in the near future.
    India is a brighter picture but it's relationship with Pakistan remains a huge problem and it remains to be seen how much more open it's society will evolve.
    Britain, with it's own growing population [not just immigrant-fueled] still remains in a terrific spot to be one of the world's leading economic powers if the Government would focus on unshackling the economy and let it grow with lower taxes and reduced regulations.

  21. manicbeancounter
    Posted August 7, 2010 at 1:41 am | Permalink

    You are quite right that the Chinese and Indian economies will soon be larger than those of The EU or USA. If the most advanced nations are not to stagnate they must accelerate the advance into higher value-added activities.
    The government's role in this should be, at minimum, to refrain from hampering the creativity and the flexibility that this requires. Further it should provide a structure to enhance the comparative advantages that the UK enjoys. For example, we are
    – In learning – some of the best universities in the world and home to the global language.
    – In Finance. Creating banking regulation that will both prevent the build-up of systemic risk, whilst at the same time encouraging/enabling future innovation.
    3. In Climate Change. The current aims to reduce CO2 emissions by 80% by 2050 are totally unrealistic. The attempts to do so will only serve to make Britain’s poorer and fail to meet our growing energy requirements.

  22. jedibeeftrix
    Posted August 7, 2010 at 1:23 pm | Permalink

    The Carnegie endowment fund in the 2050 report suggest that by 2044 the Indian economy will be larger than that of France Germany and the UK combined, and in the same time frame both Brazil and Mexico will have larger economies than the average of the big EU three:
    http://jedibeeftrix.wordpress.com/2010/07/03/brit

    Does rather suggest that we should be chasing the Bric nations if we wish to find future growth that will sustain our standard of living.

  23. Iain gill
    Posted August 7, 2010 at 3:29 pm | Permalink

    yes and we should not be so naive with india and china as we are being

    especially in issues such as work visas, intellectual property protection, "aid" and so on

  24. Glyn H
    Posted August 9, 2010 at 4:23 pm | Permalink

    A rather belated comment but The Party by Richard McGregor tells how China is still a totally closed communist regime (Like some Islamists we should be careful about their plans -ed). We should be pouring money into defence and intelligence and electronic defence of our nation against these threats. We need to look up and outwards not into the sclerotic socialist undemocratic EU full of Kinnocks and Ashtons and huge statist inertia.

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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