Growth of the Global Economy to be increasingly driven by three of the BRICS: China, India and Brazil, says Director Bajpai

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Growth of the Global Economy to be increasingly driven by three of the BRICS: China, India and Brazil, says Director Bajpai

March 30, 2014

Speaking at an event organized by the Tata Consultancy Services (TCS) on March 28, Nirupam Bajpai said over the next 7-10 years, China will be joined by India and Brazil as the leading players of the world economy. On the other hand, U.S. and the economies of Western Europe will witness a declining trend. Of course, for all the three – China, India and Brazil, a lot remains to be accomplished and the next ten years will be decisive in each of the nations and their vast populations’ future.

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If one were to try to trace the genesis of the U.S. decline, it goes back to the Reagan Presidency 1980-88. President Reagan was of the view that America’s problems lay in its government (had become too big and with unnecessary regulation) and that low taxes and deregulation were the solutions.

By the time the Reagan presidency ended, in 1988, the U.S. government was on a course to get weaker and weaker in the years ahead. Two terms of Reagan presidency followed a single term of senior President Bush (1988-92) essentially following the same set of policies. One of his famous lines was “Read my lips, no new taxes” and furthermore tax breaks for the rich in addition to further deregulation of the economy, again furthering the weakening process of the U.S. government.

Interestingly, the next eight years, which were the Clinton Presidency years (1992-2000) too did not arrest this decline since it did not undertake anything beyond what can at best be characterized as modest correctives only, something one would not have expected from a democrat president. In fact, the second term of Clinton saw major financial sector deregulation which eventually came to haunt the U.S. economy.

Finally, the two-term junior Bush presidency (2000-2008) weakened the government considerably more with two wars – in Iraq and Afghanistan; further tax breaks for the rich; and declining social sector spending. Therefore, the seeds of the 2008 economic crisis were sowed in 1980 and the government was extremely ill equipped to deal with challenges like financial collapse; inefficient healthcare; low performing public school systems; natural disasters like hurricane Katrina, and unsustainable energy systems among others.

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The Obama administration from 2008 onwards, at best, succeeded in arresting the decline and reversing the recessionary trend for now. The U.S. economy added 175,000 jobs in February, 2014, but the unemployment rate ticked up to 6.7 percent last month as more people entered the labor force to look for jobs. The number of long-term unemployed -- those who have been out of work for six months or more -- rose by 203,000 to 3.8 million. The U.S. economy has serious structural issues to deal with. The bursting of the housing bubble and a weakened banking system along with a budget deficit exceeding $750 billion or more, including charges for the financial bailout, roughly amounted to 5% of GDP is the highest proportion since the Reagan era. And this is when the U.S. has NOT even begun to address the challenges of climate change, broken infrastructure, health care, and schools. Briefly put, the outlook for the short to the medium term at the very least does not look very promising.

Turning to China, while the 2008 global crisis did hit the country hard, but China will recover. China’s big challenges are not so much on how and when will it get back to a high growth trajectory, but that how to develop their laggard provinces of central and western China and how to deal with the vast and rapidly growing income inequalities in the country. Of course, as the U.S. and west European countries see further decline, China will increasingly have to enter other markets with its products and in the interim have its economic growth driven by the domestic market and major public investments in the provinces of western China.

As far as India is concerned, going forward, it will face enormous challenges in the areas of rural development, urban sustainability, national infrastructure, and human capital and population. However, while the challenges may be enormous (almost seeming to be unsurmountable), but so is India’s capacity. Despite the herculean challenges facing India, solutions to virtually all of the country’s problems are right within India. India needs dynamic, visionary and decisive leadership that puts together a growth strategy that has at its heart the key objective of creating large-scale job opportunities. This can happen with a strategy that focuses on labor-intensive manufacturing; agro-based industries and overtime becoming a knowledge based economy.

India will add hundreds of millions of people to the urban economy in the years and decades ahead. India’s cities need to be safe, efficient, pleasant to live in, supported by infrastructure, able to create jobs which are globally competitive, etc. Briefly put, India needs a revolution in sustainable urban planning.  To be able to create large scale job opportunities will mean solid systems of education-apprenticeship, vocational training, etc., perhaps along the German lines that link schooling with early labor-market entry.

On the national infrastructure front, inter-city rail upgrading, sustainable and secure energy, watershed management (river-linking to the extent that this is a sound and safe concept), dams policy, fiber connectivity nationally, ports and airports, etc.  India will also need an integrated, life-cycle, population scale vision of human capital accumulation.  This includes: Population stabilization and early childhood development, especially to overcome the scars of under-nutrition, which may be India’s greatest plague. 

On the education front, education for all with improvements in quality of education (to improve teaching and learning outcomes) and education-to-job linkages will be critical.  Manpower for skill and occupational needs in the next twenty years will be high as the economy urbanizes, modernizes, and becomes more service-sector oriented.

India needs to get back on its unfinished reform agenda in order to attain and sustain high rates of economic growth.  Of course, the priority now must be not only on growth, but on the triple bottom line of growth, equity/inclusion, and environmental sustainability.

The sustainability challenge will occupy India and the world for decades, not just for years.  All countries face the challenge of adapting to ongoing climate change, managing growing water scarcity, protecting endangered ecosystems and species, etc.  As one of the world’s most crowded country, India faces this challenge more urgently than others.

As for Brazil, it is reaping the benefits of years of reforms that have delivered greater economic prosperity. Growth and sensible policies have allowed 40 million people to join the middle class over the last decade. Now the challenge is to create the conditions that will allow further improvements to living standards and sustained reductions in income inequality in a sound macroeconomic environment. Likewise India, long-term challenges remain in Brazil – move forward with structural reforms; infrastructure up gradation; making business environment more conducive to domestic and foreign investment; tax reform; further opening of trade and FDI regimes; and laying far more attention and resources on education and skill development to fight inequality and poverty.