GDP, trade and exchange rates 

China, having surpassed Japan’s GDP a few years ago, is now taking aim at that of the USA’s. It took China a little less than a decade to overtake Japan. But then Japan has hardly been growing since 1995 and its GDP has been roller coasting between $4-5 trillion.

Overtaking the USA will still take some effort as that country has begun posting some smart growth after the gargantuan Obama stimulus package pump primed not just the US economy but also the world’s economy. Despite this, Chinese GDP is expected to surpass that of the US well before 2020 when it will be about $24.6 trillion to the USA’s $23.6 trillion.

To replicate China’s achievement might be a tall order for a country like India, which matches it in size and potential, but apparently not in political structure and national will. If India keeps growing at the present rate of about 7%, its GDP will surpass that of China by 2045 and if India’s population stabilises in 2050 at 1.6 billion, then in all likelihood its GDP too will surpass China’s. It is now about one third of China’s.

But GDP alone does not make a nation wealthy. China’s current per capita income keeps it in the company of countries like Algeria and Albania. Even in 2050 when the Chinese GDP will be much bigger than that of the US, its per capita income will still be less than a fifth of that of the USA.

Neither does GDP alone make a nation powerful. Midway in the 1800’s when Britain was at the peak of its world power, its GDP was about 5% of WGDP. The GDP’s of many Arab countries exceed Israel’s, but we know where they are in terms of power.

But when you get down to the basics, power is more a relation of the money available with a government than its GDP. This simply means the larger the revenues the greater the power at the disposal of a government. The US today has a Tax/GDP ratio of about 35, while that of China is 19 and India’s 17.5.

The ability to raise revenues is linked to the per capita income, income inequality and tax compliance. The per capita income of the USA is now $47,000, China’s is $4300 and India’s just $1300.

Given this, the ability of countries like India and China to squeeze more out of their people and squeeze greater effort is limited. Even in 2050, if all the projections come true, the USA per capita will be four to five times bigger than either India’s or China’s. So, should we be counting our chickens before the eggs hatch?

Nevertheless, it is being confidently predicted that the top three places in global GDP rankings will be held by the USA, China and India, with the other major economies and powers like Brazil, Germany, Japan, Russia and UK straggling well behind in GDP terms. That’s a good thought. As Ghalib said: “acha hai khayal Ghalib dil bahlane ke liye!”

It would seem that India and China are destined to live out the foreseeable future as rivals, if not as adversaries. But rivals need not be enemies and neighbours need not get fratricidal.

If there are two large and rising powers in a region, rivalry is inevitable. France and Germany or Brazil and Argentina come readily to mind. A hundred and fifty years ago France and Britain were bitter adversaries. The rise of Teutonic nationalism and of Nazism united the two countries against a common enemy. The triumph of liberal democracy has largely blunted Franco-German rivalry by entwining them economically, while the advent of the European Union has made the borders seamless. Friends and enemies are now one.

The situation between India and China is not very different. Nationalism arrived in both countries at about the same time in the early 1900’s with the advent of Sun Yat Sen in China and MK Gandhi in India. After decades of turbulence, servitude and exploitation, in the waning 1940’s both countries emerged as “free nations” with entirely different political and economic systems.

Mao Zedong and Jawaharlal Nehru were leaders with entirely different personalities, ideologies, visions and world-views. Mao’s ruthless instincts were honed as the leader of the Communists in a bloody civil war. On the other side Jawaharlal’s were finessed under the tutelage of Mahatma Gandhi into that of a dreamy idealist.

The isolation of the two countries that the British had so assiduously nurtured by supporting an independent Tibet was rudely shattered by its annexation by China in 1951. This and the handing over of Xinjiang by the then USSR to the new PRC made the Han and the Hindu neighbours for the first time in history.

With US markets rapidly shrinking, China needs to find markets elsewhere to sustain its export led growth model. China derives much of its export prowess due to its undervalued Yuan and exploitative practices in the work place.

The economic profligacy of the USA and China’s somewhat naïve hoarding of trillions of dollars as reserves makes it the USA’s co-equal in causing the global economic mayhem. There is no sign that China has derived lessons from this and still does not seem to have grasped the essential reality of its trade relationship with the USA.

Many American economists have taken to describing it as akin to that of a dope peddler and drug addict. China supplies cheap goods to the USA and then proceeds to invest its trade surplus in US securities, which in turn fuels more American consumption. This gives China the two-digit GDP growth rates it has got addicted to and the Americans the high standards of living.

The way out of the current crisis is only when the US starts to curb its appetite for overseas goods and overseas adventures like in Iraq and Afghanistan, and China gets used to more realistic and manageable growth rates, in which case the revaluation of the Yuan becomes a mandatory obligation.

India-China trade is burgeoning and is now headed to pass $70 billion by the end of 2012. The trade balance favours the Chinese by over $20 billion. The irony of this is that even this relatively small amount of money will then act as a part of China’s US securities portfolios and thereby feeding the consumption frenzy in the US even more. Clearly a way has to be found out of this situation as well.

China’s suggestion that the Renminbi also becomes a world reserve currency finds few takers in India. On the other hand, the Chinese may not be reckoning that India might prefer a more market oriented Rupee-Renminbi trade arrangement to keep the books balanced and business orderly. The bridge needs to be crossed soon. But it still does not seem to be on the agenda of the two leaderships.