The Great Shift East

As the East continues to rise, everyone must now be asking out loud not just what is good for the West but what is good for the world. You would think.

Yet, practically without challenge, ever greater policy discussion today turns on the West (or the US) retaining international economic dominance: “Is the West history? What must we do to respond?”

That challenger to continued US hegemony is, of course, China.

Towards the end of 2010 China became the world’s second-largest economy, along the way overtaking Germany, the UK, France, and all the rest of Western Europe. Today, the economic strength of China is exceeded only by that of the US. By some accounts China today already consumes half the world’s output of refined aluminium, coal, and zinc; and uses twice the quantity of crude steel as does the EU, the US, and Japan combined.

India, the only other billion-people nation on the planet, has launched itself onto a similar growth path, after a half-century of moribund quiescence. These two giant economies now grow at a pace previously recorded only in easier-to-ignore, special-cased, tiny Far East Asian island nations. This emergence of the East has, in the last three decades, yanked the world’s economic center of gravity nearly 5000 km out of its 1980 mid-Atlantic location eastwards past Helsinki and Bucharest, onto a trajectory aimed squarely at India and China.

That global economy activity has moved east in this graphic fashion shows the rapid growth in incomes going to the large chunks of humanity who live in China, India, and the rest of East Asia. (Population itself changes much more gradually; this sharp east-directed rise of the rest does not come from just population growth.)

Together with this growth has been the lifting from extreme poverty of over 600 million people—a large and rapid improvement in the well-being of humanity unprecedented in the history of this planet.

But more is to come. Today, the income of the average person in the East is still lower than that of his counterpart in a dozen countries in Africa; his carbon footprint is less than one quarter that of the average American; and he is intent on making not just refrigerators and running shoes, but solar panels, wind turbines, and nano-cars cheaply enough that yet more of humanity can afford them.

What’s not to like?

But many policy-makers and observers in the West fail to share this optimism on the shifting global economy. Instead, they ask: Will emerging Asia now buy up all the West’s assets and use up all the world’s raw materials? Will emerging Asia soon command the entire world’s jobs, absorb the entire world’s investment? This is Rise of the Rest on a massive scale: What must the West do to respond?

Contrary to this alarmist view, there is, of course, always the possibility that this shift towards the East might, in truth, be only beneficial to the West.

But, independent of the eventual outcome, if now the East is indeed viewed as challenging the West, the correct question should not be what is good for the West or indeed for the East, but instead what is good for the planet. And if one side loses while the other side gains, compromise is needed: What contours frame that bargain?

In the alarmist scenario the West is overtaken in the next 10 years: So, how much would people in the West be willing to pay people in the East to prevent that? How much would the East have to be compensated to keep the West ascendant? How much of a disruption in the East’s development trajectory would the West consider justified for the West to remain Best?

The tradeoff, unfortunately, seems far from favourable.

China today faces possible trade reprisal even though its average citizen remains poorer than his counterpart in Belarus, El Salvador, and Jamaica, or for that matter, across 9 countries in Africa. If China kept its current average income but had the same population as, say, Namibia and were located on the African continent, China would today be a candidate for US foreign aid, not a potential rival for global hegemony. In the last 30 years China has lifted over 600 million people from extreme poverty: this is double the population of the US or the EU, ten times the population of the UK. In the last three global economic downturns, China has provided a growth boost to the world economy multiple times what the US failed to do. What good does it do the world if the West disrupted so successful a poverty-reducing machine, so effective a stabilizing influence for the global economy?

No one yet knows answers to the difficult questions on what is best for the world. But I suspect that considering them seriously will lead to optimism and hope for the changes given in the Figure. That shifting global economy has improved the well-being of humanity for the last 30 years: to overturn or even slow these changes now for short-term domestic gain can reveal only a tragic failure of global political vision.

A terrifyingly hostile place to be born a girl

When I wrote "How can hundreds of millions...", many readers, of course, quickly linked in their minds that gender imbalance to the many horrific tales one hears emerging from China's one-child policy. If 119 boys are born for every 100 girls - as usually reported for China - then that works out to 840 girls to 1000 boys. Given China's population of 1.3 billion, this means 24 million Chinese men of marrying age without spouses by 2020.

It is instructive if grim to note this gender bias is seen as well in the very differently-governed India where the 0-6 age group now has 914 girls to 1000 boys (down from 927/1000 in 2001), confirming how the country has become "a terrifyingly hostile place to be conceived or born a girl", pointed out to me by Vinayak @kayaniv.

The global economy's shifting centre of gravity

Define the global economy's centre of gravity to be the average location of economic activity across geographies on Earth. If you go grab incomes and geographical location data across nearly 700 identifiable places on the planet (World Development Indicators Online, Asian Development Bank, Google Earth, Brinkhoff; Grether and Mathys) you will see that in 1980 the global economy’s centre of gravity was mid-Atlantic. You will also see that by 2008, from the continuing rise of China and the rest of East Asia, that centre of gravity has drifted to a location east of Helsinki and Bucharest. Extrapolating growth in almost 700 locations across Earth, gives you the world’s economic centre of gravity shifting by 2050 to literally between India and China. Observed from Earth’s surface, that economic centre of gravity will move from its 1980 location 9300 km or 1.5 times the radius of the planet.

A graphic illustration of this is given in the Figure. The dots in black are 1980-2007; those dots reduced and in red are for 2010-2049 in an extrapolation. The center of gravity calculations are performed in 3-dimensional space and then projected onto the normal cylinder tangent to the planet at the equator.

My paper with the same name as this post describes more fully the ideas here.

(Thanks to Google Earth for help with this. To transform a 3-dimensional sphere into an unfolded 2-dimensional flat plane, the mapping is not a Hilbert space projection. For one, the tangent normal cylinder is only locally linear; it is therefore not a linear space. I calculated the dynamics using R; I generated the sequence of world maps in python; and I then used gimp and ImageMagick batch-processing to produce the final animation.)

One quick look at the world's shifting economic centre of gravity

With constant twitter and Facebook updates, I find myself putting off blogging anything altogether. Many items that might have appeared here have gone there instead. But then this entry doesn't really go in 140 characters.

At Hay Festival last weekend I appeared together with Howard Davies on a panel discussing the global economic crisis. For that and for some work (teaching, writing) that I'm doing on the global economy, I prepared this animation:




(A somewhat fuller-sized animation appears on my econ.lse site... but then we are talking about the world, so, despite the best efforts of Google Earth, anything on a computer screen will always be a little too small and representational.)

Obviously, a few more things need still to be thought through on this but for now the flat-world map animates the shift in the world's economic centre of gravity (building on calculations by Jean-Marie Grether and Nicole Mathys). The rise of China and India since the early 1980s has shifted the world's economic center of gravity 1800 km - 1/3 of the planet's radius - deeper into the Earth's crust, away from the US, and towards the East. The transition accelerated in 1991 and 2001, each time the US was in recession.

It might seem peculiar that the world's economic centre of gravity is so far north - is there some massive production going on near the North Pole that the world's military haven't told us about? No, that feature comes instead from how the 2-dimensional flat map has to represent something going on in a 3-dimensional spherical Earth. Suppose, for illustration, that Earth has two roughly equal centres of production at the same latitude just north of the equator but on the same great circle. Their centre of gravity is at that same latitude but deep within the Earth. Then, when you project a straight line from the Earth's centre to that centre of gravity and keep going until you burst out of Earth's surface, you come out quite far north - certainly further north than those two production centres were to begin. So, as long as most of Earth's production occurs in the Northern Hemisphere and aren't all closely located to each other so that only one side dominates, projection onto a 2-dimensional flatmap always shows the centre of gravity on the Earth's surface appearing quite far north.

Although it's not, strictly speaking, an error, I do think some re-definition of concepts would be useful. That's something I'm trying to fix now.

PS I've already referred to my paper on post-1990s East Asian economic growth elsewhere on this blog but, yes, that article contains more detail on the effects described in the animation.

Where in the world is Asian Thrift and the Global Savings Glut?

Sometime in the early 1990s the US began to move its international trade account from approximate balance into burgeoning deficit. From then on the US trade deficit grew year on year so that by 2006 the US consumed nearly US$900 billion more than it produced.

Such excess amounted to 7% of US GDP—up from an average of 2% over 1990–1994. For perspective, the US trade deficit in 2006 was nearly as much as the entire annual production of goods and services in the 1.1 billion-peopled economy of India (this was an improvement, though: in 2005, the US deficit was strictly greater than India’s GDP). And a 7% ratio is the same as that Thailand had in June 1997 on the eve of the run on the Thai baht precipitating the Asian currency crisis.

Except for the possibility of trade with outer space, the US deficit has to be matched dollar-for-dollar by trade surpluses in the rest of the world. Correspondingly, therefore, the rest of the world has been saving—consuming less than it has been producing—and accumulating dollar claims against the US as a result.

In this description, however large the global imbalance, a savings glut—wherever or however it might arise on Earth—has no independent existence. It makes as much sense to say the world’s excess savings caused enthusiastic US consumers to flood into Walmart to buy $12 DVD players, as to say US consumer profligacy made hungry Chinese peasants abstain even more and instead plow their incomes into holdings of US Treasury bills.

When two variables have always-identical magnitudes, obviously neither can usefully be said to cause the other. With global savings and consumption, however, looking at a third indicator, namely world interest rates, is suggestive. The Figure shows world money market interest rates falling sharply through the 1990s, as would be suggested by a global savings glut driving the large global imbalance.

(The Figure is for short-term nominal interest rates. Charting this for real long-term rates accentuates the fall. Subtracting actual inflation to construct real short rates makes the decline less obvious although not vanish. But I’m going to dispute this reasoning next anyway, so let’s keep the Figure.)

Many other factors could, of course, have driven down short rates: US monetary policy responded to national economic downturns in 1991 and 2001. Through the 1990s inflation rates worldwide converged and fell, together with short-term interest rates set by central banks everywhere. The burst of the dot-com bubble in March 2000 saw the NASDAQ index decline 77% in the following 18 months, prompting action by the US Federal Reserve. Japan’s monetary policy during its decade-long recession drove nominal interest rates there to zero.

It seems useful to obtain additional evidence on whether the global imbalance was indeed driven by a global savings glut or, in some interpretations, Asian thrift.

The Figure shows that, indeed, Developing Asia in general and China in particular, were running large and growing bilateral trade surpluses against the US.

The next Figure, however, shows that running trade surpluses against the US was pretty much the pattern nearly everywhere in the rest of the world. Both the EU and the bloc of oil-exporting countries, had rising bilateral trade surpluses against the US too, although of course the notion of “EU Thrift” has hardly ever been bandied about in international relations. Summed, the EU and oil-exporters trade surplus against the US moved almost exactly in step with that of China’s.

Dwindling investment opportunities and an aging population in Europe might, indeed, over the longer run, smoothly and gently, end up pushing greater savings in the direction of the US. But why would those same persistent movements cause higher-frequency gyrations in the EU’s trade surplus against the US that match almost exactly that of China’s in particular and Asia’s more generally? It seems to me the most direct and straightforward explanation is that the causal impulse to these trade surplus dynamics is instead the US economy, and everyone else is simply passively responding.

Indeed the ratios to the overall US trade deficit of individual country bilateral trade surpluses—run by each of China, Developing Asia, the EU, and the oil exporters—have time-series profiles that, after the mid-1990s, were essentially flat. Sure, China's and Asia's trade surpluses against the US were large and growing. But they were growing only because they remained roughly constant in proportion to bilateral trade surpluses elsewhere and, more to the point, to the US overall trade deficit.

So, yes, of course, there was a global savings glut. It necessarily mirrored exactly US profligacy, both private and public. Looking at these last few Figures, however, one might be tempted to think that excesses in the US economy drove trade surpluses everywhere else in the world, rather than that causality ran from Asian thrift to US trade deficit.

The reality, however, is almost surely that some combination of factors—central bank policy, Asian thrift, US consumer profligacy, US government actions, cheap East Asian goods resulting from a low-wage yet productive workforce (which must be a good thing surely)—was responsible for the large global imbalance of the early 2000s. To put the blame monocausally on Asian Thrift seems both irresponsible and inconsistent with the facts. And it is important to get to the root of this: the resulting global imbalance and its associated massive flows of financial assets likely led to the extreme financial engineering that now everyone claims no one responsible ever really understood in the first place.

In producing the Figures above I found useful the data and discussions in Ben Bernanke (2007) “Global Imbalances: Recent Developments and Prospects”; Thierry Bracke and Michael Fidora (2008) “Global liquidity glut or global savings glut”; Menzie Chinn and Jeffrey Frankel (2003) “The Euro Area and World Interest Rates”; Niall Ferguson (2008) “Wall Street Lays Another Egg”; Paul Krugman (2005) “The Chinese Connection”; Kenneth Rogoff (2003) “Globalization and Global Disinflation”; and Brad Setser (2005) “Bernanke's global savings glut”.

Daniel Gross (2005) “Savings Glut” traces the history of the idea that a global savings glut is to blame for many current US economic ills. The subtitle (The self-serving explanation for America's bad habits) reveals the conclusion that Gross reaches. Fareed Zakaria (2008) “There is a silver lining” describes the profligacy of the US consumer and government since the 1980s, and how the current global economic crisis might turn that around. He remarks that the US “cannot noisily denounce Chinese and Arab foreign investments in America one day and then hope that they will keep buying $4 billion worth of T-bills another day.”

The data I used are from the World Bank's World Development Indicators (WDI) Online, April 2008; and International Monetary Fund (IMF), Direction of Trade Statistics (DOTS) and International Financial Statistics (IFS), November 2008, ESDS International, (MIMAS) University of Manchester. Developing Asia, in IMF terminology, comprises Bangladesh, Bhutan, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao People's Democratic Republic, Malaysia, Maldives, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Tonga, Vanuatu, and Vietnam. In the Figures, China refers to China Mainland.

(This post also appears 21 November 2008 on RGE's EconoMonitor on Global Macro and Asia.  See also December 2008 discussion on the FT Economists' Forum on global imbalances.)

Who moved my BlackBerry... and those hundreds of millions of people?

China and India are, for now, the only billion-people economies. In one popular telling, China shifted hundreds of millions of workers from farms to urban areas. In that story that switch rate, paired with reasonable assumptions on relative productivities in relatively backwards agriculture and forward-looking manufacturing just about matches China's overall growth rate, after factoring in other measureable progress.

A related not uncommon view further has it that India codes workman-like software, designs lower-end pharmaceuticals, answers queries about insurance claims over the telephone, and scans X-rays that Western doctors are too busy to do. These jobs might pay far less than done in the West but, in their part of the global marketplace, they almost surely pay better than stitching together textiles in Shanghai (上海) or assembling refrigerators in Shandong Peninsula (山东半岛).

So, which economy has had its growth driven more by changes in labour input? Where have more people moved out of poverty?


The Figures (using data kindly provided me by Dale Jorgensen and Khuong-minh Vu that they had used in their paper "Information Technology and the World Economy", 2006) show decompositions of Chinese and Indian growth into contributions due to physical capital, labour, and productivity (TFP). Earlier on, between 1989 and 1995, China certainly drew more on labour than did India to power economic growth and, true to stereotype, drew more on labour hours ("mere sweat and effort") than on labour quality, i.e., on skills and human capital. But even then the difference was small.

By 2000-2005 the most recent period for which we have data, China had come to rely more on physical capital, i.e., on machines. Its reliance on labour had fallen to 13%, almost exactly half that of India's. That shift occurred, moreover, with little loss in productivity's contribution. Through both periods and in both countries, productivity never contributed less than 40% of growth overall.

By 2000-2005, in fact, China's profile of growth contribution from capital, labour, and productivity almost exactly matched that of the US. The difference, of course, is that China has been growing at 3 times the rate of the US.




The next Figure (per capita income on the horizontal axis; hundreds of millions in $1/day-poverty) shows how China's much, much more impressive aggregate growth has lifted half a billion people out of extreme poverty in the last quarter-century; India, on the other hand, has only recently and, by comparison, imperceptibly started along the same path. But with a long way to go still. The data are for 1984-2004; I had used them in a previous blog posting.



My own small contribution on global inequality the last couple months was extremely practical. I did what I could in charitable fundraising. The video shows my friend Maria Gratsova holding the board for an airbreak. I performed a jump spinning hook kick. This particular event was the LSE Development Society auction on 05 February 2008, and I was up on the auction block. Fortunately, someone did buy me - for much more than I'm worth. But the money went to a good cause and the deal was that we had a paid-for dinner together afterwards.

(Yes, yes, I know, boards don't hit back but an airbreak means the board swings loose, and so is harder to break. And of course that they don't hit back doesn't mean they break everytime. In this next video [from September 2007] I attempted two boards on one jump and only broke one.)



Thanks to the kindness of friends, Maria and I held a repeat performance at LSE's Malaysia-Singapore Students Night, 23 February 2008, in the Old Theatre. Money changed hands there too, and for just as worthy a cause. (This still is from LiEe Ng's camera; thanks LiEe!)

Global balance and equality

In August 2007 I was part of the opening keynote panel discussion at the Singapore Economic Review Conference (and got to have lunch with LSE alumni and friends in Singapore).

I wanted to show the large forces that drive global inequality and poverty, those changes that affect, in one fell swoop, the quality of life for many of the 6.3 billion people on earth.

I have two candidates for massive worldwide change: First, economic growth; second, China. The graphic illustrates both.



(a larger dynamic animation can be invoked if the inline version above isn't clear enough in your browser; or just click anywhere in the figure).

The vertical axis measures millions of people living on less than 1 US dollar a day (actually, the threshold is 1 International Dollar a day, but close enough). The horizontal axis is per capita income in the country or bloc of countries: Economic growth means movement rightwards horizontally. The size of a bubble measures the total population. EAP indicates East Asia and the Pacific Region; LAC, Latin America and the Caribbean; MENA, Middle East and North Africa; SAS, South Asia; and SSA, Sub-Saharan Africa. Additionally, China and India are given separately in the graphic.

The animation follows these continental groupings over time, from 1990 through 2004, and shows how as growth occurs, poverty falls.

In principle, if inequality within a continent or within China or India increased sufficiently with economic growth, then the corresponding bubble in the picture might well rise vertically. All that means then is that, in that case, even though average income increases with growth, inequality increases so overwhelmingly that the joint growth-inequality process grinds ever more people into ever greater bone-crunching poverty.

(To be clear, inequality does not have to increase with economic growth. But many people and quite a few economists think it might---hence the so-called tradeoff between equality and efficiency. The data do not speak very strongly on this, in either direction. But I think such a putative regularity is of little consequence for the point here.)

Almost uniformly, the graphic shows inequality is unable to rise enough to overcome the benefits of economic growth. As a matter of logic alone, of course, it might: an actual, large instance in the animation is China between 1996 and 1999: In that 3-year period the China bubble moved rightwards and upwards. So there's nothing in the arithmetic that rules out the possibility. But it is unusual. As time proceeds, almost uniformly, the bubbles move southeasterly, shifting rightwards and dropping towards the floor. This is a very good thing. Economic growth reduces poverty.

In the animation, right at the start of the sample Eastern Europe and Central Asia (ECA) implodes leftwards, just as post-Communist transition began. But then after that pretty much only the rightwards movement is visible. Compared to China, that other 1-billion people economy India, up through 2004, still hadn't done very much. Sub-Saharan Africa (SSA) all this time basically did nothing but percolate upwards: It didn't grow and it saw vast numbers of its people fall ever further into grinding poverty.

In 1981 1.47 billion people on earth lived on less than 1 dollar a day. By 2004 that number had fallen to 0.97 billion, a reduction of half a billion. (If you don't like these numbers, you come up with better ones. In economic research it takes a model to beat a model, so simply complaining that a model isn't a good model or is unrealistic doesn't get you very far. So too whining that an estimate isn't a good estimate.) The animation shows that pretty much all of that worldwide poverty reduction is due to just ... China.

Since this animation, like all digital goods, is infinitely expansible, I also presented it at a British-Malaysia Chamber of Commerce lunch and as part of a lecture at the British Council in Malaysia, both also in August, as part of Malaysia's 50th anniversary celebration of its independence from Britain. (The animation is also on youtube and you can put a version on your cellphone if you like.)

The underlying data are from Chen and Ravallion (2007) "Absolute Poverty Measures for the Developing World" and from World Development Indicators (2006) online. Further analysis is in Quah (2007) "Life in Unequal Growing Economies". Related discussion appears in Quah (2003) "One Third of the World's Growth and Inequality".

I generated the animation by

latex 2007.08-SERC-lug-dq.tex
dvips -pp 5-10 -o - 2007.08-SERC-lug-dq.dvi | ps2pdf - - | convert -delay 80 - 1-2007.08-SERC-lug-dq.gif

i.e., using standard tools latex, dvips, ps2pdf, and convert.

"So, where again did you say teach now?"

Beginning of the month, 07 December, I was in Delhi, at LSE's Asia Forum. I'm lucky enough to have gotten to speak at all three of these now, beginning in Bangkok in 2004, then Hong Kong in 2005, and this year Delhi. And it is with some considerable pride when it came clear to me at this event that the LSE in India is no casual flirtation but instead a relationship that has bedded in over decades.

Since the Forum itself has already been written up elsewhere, I won't rehearse again announcements on how the Reserve Bank of India and the State Bank have helped endow the IG Patel Chair at LSE; how Nick Stern, who'd just authored the Stern Report on the Economics of Climate Change, will leave the UK government to be the Chair's first incumbent, and so on.

Instead, I'll just put down what I saw. At the Forum both Prime Minister Manmohan Singh and President Abdul Kalam attended and spoke. President Kalam is the only Head of State with whom I have had dinner who brought along to that dinner a Powerpoint presentation to accompany his speech: a detailed plan to alleviate rural poverty in India. Before becoming President, Kalam had contributed critically to India's space and missiles programs. He continues to support Open Source Software; and he is popular enough throughout India to have been nominated an MTV India Youth Icon.

Prime Minister Manmohan Singh spoke in the morning. I expected to hear good things about the relationship between LSE and India, and economics more generally, which he addressed sure enough; and about down-to-earth micro infrastructure problems in India, which, surprisingly, he did not. Instead, he talked the big macroeconomics of growth and distribution: the rise of India in the international marketplace; the changing balance of world economic power; the adjustment needed to expectations and well-being worldwide as global distributions of income and consumption shift, eastwards towards India and China.

Perhaps modern macroeconomics can stop being shy in how it saves itself only for bread and butter policy questions in the already developed economies of the world.


That morning I got to chat with Nandan Nilekani, who together with Tarun Das of the Conference of Indian Industry, Sheila Dikshit the Delhi Chief Minister, and Kishore Mahbubani the Dean of Singapore's Lee Kuan Yew School of Public Policy, had agreed to be on a panel with me for the Forum. In case anyone missed Nilekani on p. 5 of Thomas Friedman's The World is Flat (credited, no less, with planting the eponymous idea in the author's mind) Nandan really is as enthusiastic and nice and down-to-earth as is widely reported. He confirmed to me the amount of money spent on Indian publicity at the World Economic Forum last year (2006) in Davos. I told him how much I enjoyed seeing mega-celebrities and multi-billionaires lining up, scrambling, and fighting for the souvenirs his people handed out there. Fighting? Oh, yes, fighting me for those same souvenirs.

In Delhi I met many ex-students of mine, other alumni, and LSE friends. They were all so full of good cheer, I felt awkward inside when I thought about how little time I might have given them when I knew them at LSE. For the past seven years, though, I actually did at least lecture to almost every single undergraduate enrolled at the LSE and definitely to all the MSc Econ students. How do other academics deal with meeting alumni if they have never taught those alumni, but still have to represent their university in financial, intellectual, or policy negotiation with them?

The LSE Asia Forum was replete with goodwill, and rightly generated a lot of press. My own talk appeared in the Times of India 2006 December 13. (The version I prefer, one that points out infrastructure problems elsewhere, is slightly longer. But I still omitted discussion of how avoidable medical errors in the US kill 100,000 a year. Even if that were a gross over-estimate by 50%, say, that's still more deaths than from automobile accidents, breast cancer, and HIV/AIDS.)

So I'm cheering on all the billion-people economies. What used to be political correctness is now just plain, hard-nosed economic calculation.