Saturday, June 13, 2009


Gary Becker (link) and Richard Posner (link) discuss whether the gravity of world economy is moving from the US and the EU to emerging Asian economies.

Rapid economic growth and steady institutional transformation are the key drivers of Asia's economic rise in the global economy. While the United States and the EU will likely suffer from this year's recession and pursue a U-shaped recovery, India, China, Indonesia and Vietnam will continue to grow in 2009 with favorable midterm growth projections. Even minor short-run differences in economic growth can lead to a profound impact on long-run income per capita. For example, if China and India's long-run economic growth rate is about 5 percent, it would take 14 years to double its income per capita.

If the growth rate were 6 percent, which is more likely after taking the productivity shocks into account, it would take 12 years for income per capita to double. The medium-term forecasts by the IMF suggest that the U.S and Europe will grow between 2.5 and 3 percent. Similarly, that would take 29 years and 24 years to double the income per capita. The gap can be further estimated by the empirics of real convergence.

Rapid economic growth in Asian tigers will also induce their bargaining power in institutions such as WTO, IMF and World Bank. In particular, Asia's fast growing economies play a stronger role in world trade. Thus, the bargaining power of India and China in negotiating regional and multilateral trade agreements is growing. The central challenge, however, is whether Asian tigers will recognize that free trade promotes economic growth, welfare and peace. The rise of trade protectionism in the U.S (link) and Europe is a significant concern from a countervailing perspective. Even the area of climate change policy is a potential source of conflict between the US and the EU on one side and China and India on the other side.

Of course, I disagree with pessimistic arguments that the U.S will lose its leadership in innovation, technology and human capital. Indeed, top U.S universities will still remain world's top-notch sources of human capital and the U.S high-tech firms are unlikely to lose their world leadership. However, rapid economic growth in Asia will induce China, India, Indonesia and Vietnam to pursue free-market policies alongside economic, civil and political liberties to give up the authoritarian political climate. In fact, the transformation to free-market economy with independent economic and political institutions will, in the long run, determine the scope of Asia's economic rise in the world.

1 comment:

Vance said...

Great points! Keep it up.