The Renaissance Of China And India: Implications For The Advanced Economies

Using simple convergence equations, this paper projects that by mid-century per capita incomes in China and India will on average be about half the US level. In terms of total production, both countries should overtake the USA by 2050. Such developments will affect the advanced economies through several channels. The terms of trade of these economies will deteriorate as labour intensive imports, such as clothing or holidays, become more expensive when ultra-cheap supplies from China (and later India) dry up. Resource-based imports may also become more expensive in response to rising demand from China and India. Orders of magnitude suggest that such terms of trade losses may be fairly easy to absorb if they are spread over many years. On the positive side, as China and India develop they will become major innovators in their own right and the advanced countries will benefit by importing technology from them. The development of China and India may also affect the internal distribution of income within the advanced economies. If transnational corporations can earn higher profits by moving production to China and India they may use this as a credible threat to extract concessions from their existing workers in the advanced economies. An appendix to the paper presents a simple mathematical model and some numerical examples that inform the discussion in the text.