Will China And India Become The World’s Top Economies? It Depends

A new study projects that China and India will become the world’s leading economies in the coming decades, while the United States and Western Europe will lose importance. The analysis relies on productivity growth and demographics, such as US immigration policy, China’s move away from free markets, and other factors that affect nations’ future influence in the global economy.

In a National Bureau of Economic Research (NBER) paper, “The Future of Global Economic Power”, the authors project the rise in global economic power of China and India. The author of the paper is Seth G. Benzel, Lawrence J. Kotlikoff, Maria Kazakova, Guillermo LaGuarda, Kristina Nesterova, Victor Yifan Ye, and Andrey Zubarev.

According to the study, US share of world GDP [gross domestic product] will fall from 16% in 2017 to 12% by 2100 and China’s share will rise from 16% to 27%. The study projects that India’s share of world GDP will rise from 7% in 2017 to 16% in 2100, while Western Europe’s share (including the UK) will decline from 17% in 2017 to 12% in 2100. According to the research, the combined GDP of India and China will increase from 23% in 2017 to 43% in 2100.

Productivity Growth: The results are “highly sensitive to our assumed region-specific productivity rate,” according to the authors. They disagree but economist Ulrich K. Mueller, James H. Stock and Mark W. Watson cites a 2019 NBER study that “predicts lower growth for several countries, including an almost complete end to the Chinese, Indian, Russian, Eastern European countries, and the former Soviet Union catch-up labor productivity growth.

Benzel et al. Using Mueller, Stock, and Watson’s model, the United States will be the “end-of-century economic kingpin” in 2100, generating 18% of world GDP. “China and India share of production [under the Müller, Stock and Watson scenario] It will take a sharp decline from 24.2% in 2017 to 15.8% in 2100.

Under another possible outcome, Benzel et al. If one assumes that the 20-year growth rates prior to 2017 (ie, “recent growth rates”) have remained the same, “India is now the planet’s superpower, increasing its 2100 share of the global economy from 6.8% to 33.8%. ” This means increasing China’s share of world GDP from 15.7% to 22%. However, India’s economy would be 50% larger than China’s in this scenario because its population would be 50% larger than China’s but with the same labor productivity.

“All other economies see their economic impact shrink or remain roughly constant compared to the base case,” write Benzel et al. “For the US, the picture is particularly grim. Its share of the world economy will drop to just 10% by the end of the century. The story for Western Europe, including the UK, is even more shocking. In 2017, the WEU and the UK accounted for 25.2% of world output. But if recent catch-up rates prevail , their 2100 share will be only 6.4%!That is, Western Europe will evolve from the world’s largest economy to its smallest.

One can also see significant variation in a nation’s economic output due to the size of its labor force and the productivity of its workers. “[C]”Consider the US and China, which currently have roughly the same share of world GDP,” Benzel et al. write. “If today’s Chinese workers were as productive as American workers, China’s GDP would exceed US GDP by a factor of 4.3.”

The average American’s standard of living remains high compared to most of the world. “In 1997, the Chinese standard of living was only 3.5% of the US level,” note Benzel et al. “In 2017, the Chinese share was 13.8% or 3.94 times higher than 20 years ago. The 2017 ratio was 2.06 times the 1997 value. India’s standard of living also grew compared to the US. Economists positively view that millions of people in China, India and elsewhere have been lifted out of poverty due to market-based reforms.

Migration, Demography and Productivity Growth: Immigration is critical to labor force growth—an essential component of economic growth—and has been shown to improve productivity growth.

“When we gather at the national level, the influx of foreign STEM [science, technology, engineering and math] Workers explain Between 30% and 50% of total productivity growth This took place in the United States between 1990 and 2010,” according to economists Giovanni Perry (UC, Davis), Kevin Shih (RPI) and Chad Sparber (Colgate University).

Studies show that higher immigration levels boost the US economy, especially in the long run. “Increasing legal immigration by 28% per year would increase average annual labor force growth in the United States by 23% above current US projections, helping economic growth and addressing a slow-growing US workforce,” according to an analysis by the National Foundation for American Policy (NFAP).

On the other hand, reducing legal immigration would put the US economy on a much slower growth path. According to the NFAP analysis, “if the United States administratively reduced the Trump administration’s policies by approximately 49%, average annual labor force growth would decrease by approximately 59% compared to a policy of no immigration reduction.” In 40 years, immigration will be cut in half while the United States has only 6 million people in the labor force.

China’s distance from free market policies: A study by Benzel et al. It assumes that China’s economic growth will not decline due to bad economic policies. Yet it may already be. “Some signs point to trouble for the country’s growth potential,” the report said The Wall Street Journal. “An IMF [International Monetary Fund] The analysis estimates that productivity growth averaged 0.6% during most of the past decade under Mr Xi’s watch. This is a sharp decline from an average of 3.5% over the previous five years.

China under Xi has favored less efficient state enterprises over the more successful private sector, the notes The EconomistAnd the consequences of maintaining the one-child policy for many years are being felt in the country’s demographics.

According to Rhodium Group’s Logan Wright, “Over the long term, China’s growth outlook is constrained by demographics, falling productivity and, most notably, the failed structural reforms of the past decade. “China’s potential growth rate is currently closer to 3% than 5%, and China is currently growing below that potential rate.”

James Pethokoukis, Fellow and Editor at the American Enterprise Institute Faster, please! The newsletter believes the United States could grow faster than China in the coming decades—if America implements the right policies. “Can the US grow at least 3% next?” Pethokoukis writes. “I think it’s possible. There’s nothing wrong with the American economy that can’t fix what’s always been right with the American economy. That’s an economy that welcomes and attracts global talent, spends heavily on R&D (both public and private), new rules on the ability to build and innovate in the physical world. Consider how the impacts are regulated and continue to reward high-impact entrepreneurship. . . . The immigration piece is obviously very important here, and China doesn’t fit.

A study by Benzel et al. It projects the future economic influence of China, the United States, and other nations, predicting that China and India will rise and that the U.S. economic influence will decline. US immigration policy and China’s economic choices will tell whether that prediction holds true.

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