Is the Indian Economy negatively impacting Europe?

Subheading: Have we over-estimated China’s role in Global Convergence?

India's Prime Minister Narendra Modi (L) is welcomed by European Council President Donald Tusk (C) and European Commission President Jean-Claude Juncker at the start of a EU-India Summit in Brussels, Belgium, March 30, 2016. REUTERS/Yves Herman
India’s Prime Minister Narendra Modi (L) is welcomed by European Council President Donald Tusk (C) and European Commission President Jean-Claude Juncker at the start of a EU-India Summit in Brussels, Belgium, March 30, 2016. REUTERS/Yves Herman

I know people who might be viewing this may not be aware of my previous work and may be tempted to close the window once you see my subheading. So, just to excite your curiosity let me show you the main issue I am dealing with here with a graphical illustration.

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I hope you are now sufficiently curious. Let me also assure you that this essay is not very long, it is only about 1000 words. So, lets begin-

Introduction/Background

(People with knowledge of economic history need not read this portion but I think it does well to show how this idea emerged.)

I got the idea to write this when I was writing my blog post titled “Akbar vs Rana Pratap” a political commentary using historical farce[i]. In order to write that article I checked what India’s current GDP size was. I had checked it last year when it was the 11th largest in the world in most of the tables and I did not expect it to change a lot in just one year’s time. But to my surprise India leap-frogged to become the 7th largest economy of the world (nominal GDP) according to both the IMF and World Bank and is all set to surpass the United Kingdom and France in probably the next two years and become the 5th largest economy in the World behind Germany.

As a student of economic history I was thrilled that I was living in a moment in history when India was about to complete its convergence and was inching closer to being either the largest or the second largest economy of the world a position it had historically occupied.

After sometime as I had my breakfast and watched the news- unfortunately just like the last year and a half the news was dominated by none other than Donald Trump and I saw that the European news channels (French, German and British) discussing what has now become their favourite topic- “Trump like phenomenon in Europe”. Unfortunately as we all know Trump like phenomenon in Europe existed before Trump himself and is only growing stronger after the Brexit vote and with the on-going refugee crisis.

Then it struck me- what if the two issues- rapid growth of Indian economy and increasing nationalism in Europe are related?

Let me Explain (Main body of the essay)

Let us get some of the things out of the way that probably anyone still reading this already knows-

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Figure 1: Levels of GDP of the world from 1–2030 AD (billion 1990 international Geary Khamis PPP dollars)[ii]

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Figure 2: Compound Annual Growth Rate of the real GDP of the World[iii]

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Figure 3: Compounded Annual Growth Rate of Western Europe[iv]

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Figure 4: USA’s share in the world economy[v]

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Figure 5: Western Europe’s share in World’s Economy[vi]

What we see is that the substantial growth that the world economy experienced from the 1950s to 1980s was mostly on the backs of developed countries of the West like the United States of America and Western European Nations and consequently they also occupied the most substantial share in the world’s economy.

But these growth levels were also achieved with the help of large population in the working age group in these countries most of which witnessed at least some increase in fertility rates after the Second World War.

But as income levels and standard of living rose there was demographic transition and these developed Western countries lost large number of their working age population. As seen in the figures 6, 7 and 8. This led to the obvious reduction in their share in the global GDP, as seen in the figures 4 and 5. But at the same time the economy of the world kept growing and will keep growing as seen in figures 1.

It was at this moment that China with over a billion people came to the scene and became an industrial powerhouse and was able to maintain global growth rates when the growth rates of the countries of the developed world began slipping.

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So, my contention is that, when China once again became an economic giant after nearly 150 years it did not cause any disruption to the world economy except for logistical changes- like shifting of industries and industrial workers and shipping from the West to the East. This was because the Chinese labour and economic growth just filled in the spot vacated by the developed countries which weren’t able to hold on to their previous position as bulwark of the global economic growth due to the scarcity of a crucial factor of production – labour.

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Figure 6: Demographic transition in the US[vii]

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Figure 7: Demographic transition1[viii]

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Figure 8: Demographic transition2[ix]

So in short, presently the two biggest economies in the world are those of the United States of America and the European Union. But the growth rates of both these countries/regions are  shrinking and so China has to step into the breach to keep the engine of global growth running.

But this year another country with a billion plus people burst into the top 10 largest economies of the world and threatens to occupy the 5th position within the next 1-2 years’ time.  That country is India.

In the ranking of the top 10 largest economies of the world, Germany is the only country in Europe which is not projected to be surpassed by India in the next 5 years. The share of the European economy which in the global arena is already decreasing will decrease further and Europeans will be accessing less goods and services.

The main point of this essay

Such economic changes are bound to have social impacts- after all economy is an important means of social exchange. Unfortunately, for Europe there seems to be a reverse co-relation between its share in the global economy and unification within its geographical territories. It is a relation where increasing share in the global economy is accompanied with decreasing number of states in Europe or increased unifying tendencies. On the other hand decreased share in world economy leads to increased number of states or increased separatist or secessionist tendencies.

A simple comparison between figures 5 and 9 seems to validate the assertion in the above paragraph.

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Figure 9[x]

In figure 9, for the year 2010, I have taken all the 28 EU states which existed before this year’s Brexit vote as 1 country and then added the rest of the countries in Europe as individual countries. For 2020, I considered that secessionist movements in Scotland and Catalonia will be successful or partially successful and increased role of the National Front in France , AfD in Germany, Geert Wilders in Netherlands will eventually lead to relaxing of unifying bonds within the EU and so their countries are counted as separate entities. Similarly it could be predicted that with the “anti-Europe” parties coming to power in Poland, Hungary and being just 1% of the vote away from the presidency in Austria- these countries could also be counted as separate elements here.

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A comparison between figures 5 and 9

Finally for 2030, in figure 9,  I have considered an eventuality where the EU completely disintegrates or is so badly weakened that it exists only as a namesake. A historical precedent helped in reaching this conclusion. What was the last organisation (before the European Union) which was dominated by Europeans and where decisions on almost all matters had to be taken unanimously? The answer- is the League of Nations. This organisational drawback of the European Union complimented at the moment by economic stagnation and divisive issues like the migrant crisis does not make imagining the near disintegration or at the minimum loosening of the unifying bonds within the European Union an immense flight of fantasy.

But can India’s growth really be having such a huge indirect impact on Europe? To answer this have a look at the figures 9 and 10 and decide for yourself-

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Figure 10[xi]

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A comparison between figures 9 and 10

Conclusion

As is evident, the curves in the figures 9 and 10 are almost identical. The reasons for this could be anything from those cited above like over-estimating China’s role in global convergence, inverse relation between the economy and unification in Europe or social disturbance caused by unequal distribution of resources in Europe especially during times of economic hardship.

Finally there is the question of whether this the second time in modern history that we are seeing this happening. Was it a similar phenomenon with regards to the rapid growth of the US economy from the end of the 19th century which led to rise of ultra-nationalism and conflict of interests in Europe?

So, I am asking you this- does this idea of mine warrant more research work?

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[i] https://monishborah.wordpress.com/2016/10/28/akbar-vs-rana-pratap/

[ii] Maddison, A., The West and the Rest in the World Economy: 1000–2030, World Economics (2008), p. 89

[iii] Brad DeLong,

http://holtz.org/Library/Social%20Science/Economics/Estimating%20World%20GDP%20by%20DeLong/Estimating%20World%20GDP.htm

[iv] Calculated by me from Maddison’s numbers available here: http://www.ggdc.net/maddison/oriindex.htm

[v] Angus Maddison, http://www.ggdc.net/maddison/oriindex.htm

[vi] Ibid

[vii] World Economic Forum

[viii] http://www.rand.org/pubs/conf_proceedings/CF124/CF124.chap1.html

[ix] Ibid

[x] http://www.euratlas.net/history/europe/1600/ and here are the sources from where those maps are made- http://www.euratlas.net/shop/maps_gis/gis_1600.html

[xi]   Maddison, A., The West and the Rest in the World Economy: 1000–2030, World Economics (2008), p. 89

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