If The US Is Not To Be The Economic Engine Of The World, What Country Will Take Its Place?

At the rate that things are going in America, it is hard to see how she can hang on to her economic leadership role in the world. So, if not the US, who? The consensus opinion that it will be China will not surprise you. But, there is at  least one contrarian opinion out there that says it will be India. That person is Gary Shilling writing for Bloomberg.

For those paying attention to America’s decline, I think it is important that we keep an eye on what the future of our world might look like. It is from that perspective that I write this post. However, in the interest of full disclosure, I do have an alternative reason for my interest in India. My eldest son (53) works for a subsidiary of the Caterpillar Corporation (the result of a recent merger). He has spent the last year in rural India supervising the assembly of 53 huge electric-wheel drive haul trucks for a new coal mine under construction there. He has over thirty of them up and running and expects to have them all operational by April of next year. My  son called me last week to ask my advice on something (his only means of communicating with the outside world is Skype). He was approached by senior Caterpillar management for the region and asked if he would consider becoming their manager for all their projects in India. That, of course, would mean spending several more years in India and that is why I have a special interest in what India’s future might look like as well as that of the US.

Mr. Shilling’s opinion that India will displace China as the growth engine for the world really is going against the current of most experts. If you were to enter the words “India, Economic Growth Prospects” in your search engine you would find that the majority of articles are predicting a slow down in growth for India. So, let’s see how Mr. Shilling justifies his view of India.

Those who are dazzled by China often forget that much of the rapid growth before 2008 was caused by the shift of global manufacturing from Europe and the U.S., not by domestic-oriented activity. China’s economy remains export-driven, with consumers accounting for only 38 percent of gross domestic product, far below the levels of many developing and developed countries.

Chinese leaders are working to shift toward a more domestically directed economy. They want households to spend more and save much less than the current rate of almost 30 percent. One of the reasons that savings play such a big role is the high value Confucian society puts on providing for one’s family. The Chinese also save to pay for education for their children and to cover health care and retirement costs because there is no equivalent of Medicare and Social Security.

The author lists a number of problems facing China.

  • China has been raising minimum wages by as much as 30% and are already losing low skill manufacturing jobs to lower cost countries like Bangladesh, Vietnam, and Pakistan.
  • Western companies are starting to resist the requirement to share their technology as a price of admission to operate in China.
  • China’s one child policy is creating a demographic problem. There will soon not be enough young people to fill their workforce requirements.
  • Rural living conditions are improving making it harder to find cheap labor for the industrial centers.
  • China’s central bank has no independence and is a political tool.

Shilling then goes over what he sees as advantages for India over China.

  • India has no constraints on population grow and for that reason the proportion of children and senior citizens to working-age people, is expected to continue falling in India in coming decades.
  • A younger population is  more geographically mobile and with the proper education and job opportunities,  this will lead to more productivity.
  • Centuries of British colonial rule left India with a vigorous democracy, which has led to a weak coalition central government and increasingly powerful states cpmpared with the centrally controlled communist system of China. Also, very importantly, the Brritish left India with the English language and a legal systen that is very different from that of China.
  • India has a rapidly growing middle class and so their economy is much more consumption orientated than China.
  • India has a vigorous and opinionated free press.

So, I find myself agreeing with Mr. Shilling’s contrarian view on India over China. In my opinion, a more free society will eventually outshine a more controlled society. Having said that, doesn’t it make you angry that we van be talking today about a third-rate country or countries that could soon make the United States of America a second-rate economic force in the world. How could this be what the Left has been wanting for so long? It makes me sick to my stomach!

Well, now you know what I’m thinking. What are your thoughts?

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16 thoughts on “If The US Is Not To Be The Economic Engine Of The World, What Country Will Take Its Place?

    1. The old guard is still in power in China. They need to move toward more consunerism and they need to loosen up on their controls over banking. That will be hard to do until the next regeme change. They, also, have to stop their one child policy, but that will take twenty years to make a difference.

  1. “Centuries of British colonial rule left India with a vigorous democracy, which has led to a weak coalition central government”

    Would that we had that here in the Peoples Republic of America.

    But I agree with you. My bet is on India to replace us for many reasons you went into (political, cultural….)

  2. Shilling may be right over the long-term, how long that is he never identified though. India has labor advantages over China but is literally decades behind in infrastructure. Power outages are constant and transportation and water issues are growing. They also have no one-child policy as China so those problems are only getting worse.

    Forbes disagrees – http://www.forbes.com/sites/chrisbarth/2012/06/06/why-india-wont-be-the-next-china-and-thats-bullish/

    Another – http://www.business-in-asia.com/asia/infrastructure_india.html

    Maybe they’ll get it together over time but it won’t be in the near-term.

    1. There is no shortage of articles that are negative on India. But, they have a growing middle class that can not be ignored. The middle class in India will soon be 600 million. If each one has two or three thousand dollars for discretionary spending, that is a lot economic growth. That won’t make them a first world nation in life style, but they will be a huge economic engine.

  3. 8 of the top 10 freest countries of the world according to the WSJ Index are ex-colonial British countries. India is still not part of those 8 but I believe it will soon replace the United States that has been dropping from 3 to 10.
    Much of the measurement used to form the index involves economic freedom and economic success. The reason for that is that the British established a strong sense of free markets and the rule of law. Most of these countries have parliamentary systems that are superior to the federal system in America.
    India has taken longer due to its size and very large population. The British, in their infinite wisdom, took the decision to separate pre-1948 Muslim India from Hindu India, and by so doing forming two nations, Pakistan and India, liberating them from religious struggle.
    I agree with Mr. Shilling. I go for India, the dark-skin British.

  4. It likely won’t be until well after China replaces the U.S., but there is data support for Schilling’s prediction…

    From the look of things, your son could have a lot of long-term upward mobility if he chooses to stay on in India.

    This list shows that in 2011 India was the world’s 9th largest economy:

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

    This next list shows an IMF prediction of GDP growth from 2011 to 2017:

    http://en.wikipedia.org/wiki/List_of_countries_by_future_GDP_%28PPP%29_estimates

    According to the IMF forecast…
    India will rise to become the world’s 3rd largest economy by 2017. By then China will have replaced the U.S. at the top of the food chain.

    India, however, will be a distant 3rd… well less than half the size of the GDP of either the U.S. or China. It’s economy will be close to double its current size, though, and growing at the same relative pace as China.

    1. It does seem like a bit of a stretch, I admit. But, the IMF may have some invalid assumptions. Should China’s growth rate fall and stay in the 5% range and should the US enter a long recession while India grows at 7% or more, it could happen.

  5. I can’t imagine China taking the place of the US. There is simply too much corruption and too little true competition taking place. If all barriers were removed for trade and exchange rates, China would be crushed on the international market. As it is, even now it cannot compete with its Asian neighbors when it comes to trade and industry, much less the rest of the world. Yet, how can it become a true economic giant without free and open trade and exchange rates?

    People are confusing scale with competitiveness and influence. The scale of China’s economy is huge, but Chinese investment gets very little bang for the buck. For this reason, I would rate South Korea, Japan, and Taiwan well ahead of mainland China when it comes to economic influence in Asia. Note that these countries are all building factories in China to take advantage of China’s low wages and the overvaluing of the yuan. When is the last time a Chinese company built a factory outside of China? What percentage of factories in China are built with Chinese money to build purely Chinese products? How much of China’s growth has been caused by Chinese patents and innovation, and how much of it has been caused by a currency that is only partially convertible on the international market? How much of China’s economy is made up of Chinese middle class spending on high priced consumer goods, and how much is made up of the export of low cost products to other countries? None of the answers to these questions are very good when it comes to judging China’s economic health.

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