Thank you very much for inviting to talk to this distinguished group. I am what in American baseball is called a ‘pinch hitter’ in the sense that apparently the IISS had a senior United States official lined up and he or she could not come, and so I only learned when I was en route that I was to speak this morning. The relevance of that for you all is that when I use numbers – and I will use some – take them as approximate facts. I am doing them from memory and I had no opportunity to prepare formal remarks and check my facts before coming.
Our topic this morning is the Changing Global Balance of Economic Power and its International Impact. Political scientists – and I rub elbows with many of them in Cambridge, Massachusetts – love the term power. I have to say I am very uncomfortable with the term economic power. I find it very elusive; there are some circumstances in which it can be given a clean and relatively precise meaning but mostly it is a term that is vastly overused in my judgement. We have good words in English, for example size, influence, leadership, all of which are in some vague way related to power but they are all different from power and I prefer to use those more precise terms than economic power. I will explain why a little in a moment.
My remarks are actually going to start out by trying to characterise the evolution of the world economy since 1950 – I am going to get a running start – and carry it forward to 2030, and I am going to focus, as economists often do, on gross domestic product, which is a measure of the total economic output of each country, just to give us a framework, at least a quasi-quantitative framework, into which to, in my view, dismiss such journalistic metaphors as superpowers and hyperpowers and things like that, all of which are too vague to be useful for understanding. Let me try to characterise the world economy over the last 60 years and for the next 20 years.
In 1950, the United States was both the world’s biggest economy measured in terms of GDP and had the highest per capita income of any country in the world. The fundamental story of the last 60 years has been that one region of the world after another has had growth rates that exceeded those of the United States and so they reduced the gap between their per capita income and that of the United States. If you just cast your mind’s eye around the world, that was first Western Europe in the 1950s and 1960s, Southern Europe, Japan, the four Asian tigers, more recently in the last 30 years China of course, which is on everyone’s minds because of the fabulous success there, and more recently India, Eastern Europe, a number of Southeast Asian countries. So we have seen this sequence of differential growth rates during this period of time. Countries never quite actually closed the gap. The ones that are very successful for a couple of decades come within 80% to 90% of the per capita income of the United States but somehow, with the sole exception of Norway, never surpass the per capita income of the United States.
The issue is that the United States economy during all of this period has not been sitting still. It has been chugging along, decade after decade after decade, growing per capita income at a little more than 2% per year. So the United States sets the bar but the bar keeps rising from decade to decade. Of course, there are some ups and downs – the United States is in a down period at the moment and I hope that we are coming out of it – but my units of observation now are decades rather than years or quarters, something we do not usually think of. If one looks forward a couple of decades, I do not see any fundamental change in that pattern: the United States continuing to grow at a steady decade to decade – and I do not mean steady year to year – clip and other countries reducing the gap in per capita GDP with the United States. That process will continue.
The United States share of gross world product has declined steadily during the last 60 years but at a very slow rate, and I expect that process to continue. The United States share will decline in the coming two decades – my crystal ball gets very cloudy after a couple of decades so I am just going forward to 2030 – but also very slowly. It sounds funny to say this in a period in which United States unemployment is hovering just below 10% and we have been through a very bad patch, but my view of the United States economy is that in its fundamentals it is a fabulous economy. It is, to use Henry Adam’s nineteenth century term, a dynamo.
What do I mean by the fundamentals? I mean basically two or arguably three things. Firstly, it is a remarkably flexible economy. Compared with the other rich countries of the world, it adapts to shocks reasonably well, not that it avoids shocks – it often generates shocks – but it adapts to them reasonably well. Secondly, it is a very innovative economy; I am not a technologist but I try to pay attention to what is going on and as far as I can tell the innovation pipeline is full for the next two decades. For the next couple of decades, you can see one thing after another, not with precision - which things will succeed and which things will not - but you can see the flow of ideas being translated into practical applications. The third dimension which I would mention which Professor Takenaka alluded to is demography. Among the rich countries, the US is a strong outlier demographically speaking and birth rates have declined there as elsewhere but nearly so much and in addition, the US labour force is augmented every year by large inflows of immigrants from around the world and this immigration into the US is in my view, a tremendous source of vitality to the US and to the US economy. When you add all of this up and I should say we are now living through demographic revolution; it takes place slowly from year to year so we do not notice it, but when you accumulate over a couple of decades, it makes a big difference.
When you look forward to 2030, what does the world economy look like? In particular, what are the changes in share of GDP? The big gainer, which is a no surprise to anyone, is China. China will greatly increase its share of gross world product. Unlike Takenaka, I do not have 45% built into my projections appreciation of the RMB, I do not think we will see that; I do have a 25% appreciation for this whole period built in. On my projections, China will not exceed the United States in size by 2030 but it will of course close the gap. It will be about 70%, a little more than two-thirds of the size of the US economy; much bigger than it is now. It will probably surpass Japan and become the world’s second largest economy in the next few years depending on exactly what the growth rates are and it will be catching up towards the US but it will not literally close the gap in this period.
China is the big gainer; the big losers, largely for demographic reasons are Europe and Japan. Remember that my measurement is GDP and that is more or built in now to the demography, it is not going to change radically no matter what happens in the next decade or two. Other countries which are mentioned frequently; India is growing, it will double its share of GDP but even at the end of the period it will be 3.5%. China is increasing the gap with respect to India. India by 2030 will become the world’s most populous country but in terms of growth rates, China is widening the gap with India and that gap is not closing during this period of time. Of course other emerging markets such as Brazil and Indonesia are all gaining share, that is to say they are growing more rapidly than the world average.
The US share declines but it does not decline by very much and again that is largely because of the innovation that is taking place and the exceptional demographic of the US during this time. Two decades from now the US will continue to be the dominant, single world economy in terms of GSP. I suggested at the outset that GDP and power are not the same and to translate GDP into influence and leadership involves a number of other steps. For example, the ability to capture GDP for government revenue varies greatly from country to country as does the coherence of the policy of the country also varies. One of the question marks in these two decades is what happens to Europe? I have suggested that Europe is in relative decline, measure in terms of GDP but it is possible that the cohesion of European policy will be much greater two decades from now. It cannot be ruled out that even while the Europe share of GWP declines, European influence will actually rise. That actually depends on the Europeans and whether they can figure out a way to stop being entirely preoccupied with their internal affairs and pay more coherent attention to what is going on elsewhere in the world.
I should have said at the outset that my projections presume a relatively benign world with no big disturbances, no big wars, no great depression; this is the world moving along in a relatively benign environment. The fact that GDP does not automatically translate into power, whatever that might mean, or influence or leadership, is illustrated well by the example of Japan which moved from being the tenth largest economy in the world in 1950 to the largest economy in the world by 1980 and without a commensurate increase in international role although it did become the world’s largest aid giver for a period, speaking in terms of financial aid. There are complex historical reasons for that but I mention it to indicate that GDP, unlike what some American political scientists have said, does not translate automatically into world influence and power.
I want to close by asking who will provide leadership for the world in the coming decades and I think the answer is that with this possible qualification for Europe towards the end of the period, is that it has to continue to be the US, for better or for worse. I do not see China stepping up to the position of world leadership. Remember that there is the injunction of Deng Xiaoping which is now 20 years old; Deng Xiaoping actually had no idea that China was going to grow as rapidly as it has in fact grown during this period and I am not sure that he would give the same advice today but we know what advice he did give and the Chinese leaders are very conscious of that. In my observation, in almost every area, Chinese leadership has not taken a global perspective. To be a leader, you have to have followers, which means you have to pay attention to the interests of your followers and where they might be willing to be led and Chinese leadership is not there yet. I think that we will have to have not only one change but probably two changes in Chinese leadership before that sort of global perspective comes into play.
There is the final point that as I understand Chinese culture, you do not like to be turned down on an invitation; there is what is called a loss of face. To be a world leader, as the US has learned over the decades, you have to be willing to be turned down and adapt your proposals according to the feedback you receive rom your counterparts in other parts of the world.
We tend to treat a successful period of world history as a golden era in which everything went well but those of us who have lived through this era remember that everything did not go well. Things went well on balance and that is why we look back on it favourably but everything did not go well at all and there were many American proposals which were simply rejected by Europe in the first instance or by Japan or by other parts of the world. To take a position of leadership, you have to have a thick skin, be sensitive to what you are hearing but not too sensitive not to have your proposals adopted. In that respect, the Chinese have a lot of learning to do if they aspire to a position of world leadership which the current leadership of China explicitly does not.
I want to close by saying I have provided a relatively smooth trajectory for the world economy. I think it is useful to do that to find out what things might be like but in closing, it is worth remembering that if one goes back a century to 1910, there was no 20 year period in the last century in which there were no big surprises which were not anticipated at all at the beginning of the 20 year period. Some of the surprises were pleasant and some of the surprises were extremely disagreeable so while one can do the sort of mainline projections of the type that I have done, we have to be cognisant of the fact that 2030 is not likely to be just like that and that there are going to be some big surprises which may be good or bad or may be mixed. One of the criteria for all of us in this dynamic world is to be capable of adapting quickly to changes that will inevitably take place. Thank you.
