China and India
By Arnold Kling
In the February 12 issue of National Review, not yet available on line, John O’Sullivan writes,
Several estimates suggest that China, India, and the U.S. will between them account–and roughly account equally–for three-quarters of world GDP by mid-century…The same estimates…show Europe falling to about 10 percent.
I don’t know about that. The U.S. accounts for just over 20 percent of world GDP today, and Europe accounts for about 25 percent. China accounts for about 12 percent, and India accounts for under 6 percent. That leaves 37 percent for the rest of the world, and if you believe “the estimates” that would fall to 15 percent by mid-century [I said 5 percent in the original post–a commenter corrected the typo/arithmetic]. (Their GDP need not fall in absolute terms to make the arithmetic work, but their per capita GDP probably does not increase in this scenario.)
If I had to bet on whether the share of GDP accounted for by the rest of the world would be higher or lower than what it is today, I’d say higher, although the uncertainty is enormous. There are some big, baby-abundant countries in the “rest,” with a lot of upside potential if they can get their institutional acts together. I don’t know who will be the next success story after China and India, but “nobody” seems like an unlikely scenario.
But I didn’t meant to go off on that. The point of this post was to mention an article in the Milken Institute Review by Diana Farrell and Susan Lund on weaknesses in China’s and India’s financial systems.
China’s financial system makes poor use of its captive pool of savings. Partially or wholly state-owned companies absorb 73 percent of bank loans, even though their average productivity is just half that of private companies. The private sector now produces more than half of China’s GDP, but get just 27 percent of the bank credit.
…[In India] some sectors pay nearly double the real interest rates charged in China. Indian companies must thus rely on retained earnings for nearly 80 percent of the funds they raise.
The root of this capital squeeze is government dominance of India’s financial system. Banks and other financial intermediaries are required to hold a large portion of their assets in government securities in order to make it cheaper for the government to its persistent deficits. This regulation, combined with the banks’ obligation to invest 36 percent of their loan portfolios in the government’s priority sectors, guarantees that India’s public sector gets the majority of the capital raised by the financial system.