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Can the Southern Engines Sustain their Growth?

by Meghnad Desai

The emergence of four economies from the ‘South’ as important players in the global economy has attracted attention. These four economies, China, India, Brazil, and South Africa (CIBS) were thought, for different reasons, to be hopeless ‘basket cases’ during the second half of the last century. Since the 1990s, their fortunes have changed. Growth rates have been spectacular in China now for about three decades, and in India, since the reform process of 1991, the economy has achieved a growth rate of GDP that on average is double the average of the thirty years between 1950 and 1980. South Africa and Brazil have not had an equally rapid acceleration, but they are already middle income countries and are noticed for their potential. Brazil’s size makes it a likely candidate as an ‘engine’ and South Africa’s leading position in Africa makes it a country worthy of inclusion in this club. In this article, the potential of CIBS to sustain their growth and be truly ‘Southern Engines of Global Growth’ is explored.

​Comparing the CIBS

The four economies are very different. Two are Southern hemisphere and two are Northern. In broad macro terms of area and population, China is the top with 9.6 million square kilometres (mkm2) and a population of 1.3 billion. Brazil is the next largest in terms of area with 8.5 mkm2 and a population of 184 million. India is the third largest with 3.7 mkm2 and a population of 1.1 billion, while South Africa has an area of 1.2 mkm2 and a population of 47 million.

The two Northern economies are very old and indeed two of the oldest continuous urban civilizations. In 1500, they were the two richest economies—though in total income terms with a lot of inequality—and continued to be so until the 1700s. The Southern hemisphere economies are younger. Brazil and South Africa also had very small populations before 1500. Thus, the one major difference between the two pairs of economies is that in the very long run the Northern hemisphere economies may be resuming their rightful place in the global ranks.

A speculative question then is— is there an ‘epochal wave’ that India and China are experiencing and if so will they ‘catch up’ and regain their relative ranking in the global economy, and, if so, when? (For the Southern hemisphere economies this is not an issue. They were not high in the global league to start, and their share of world income kept pace with their share of world population.) 

Growth dynamics

Much of the growth in China and India has been due to labour productivity increases due to the transfer of labour from low productivity to high productivity sectors. Yet total factor productivity growth (TFPG) has been modest. There have been no remarkable innovations from the two countries. They have taken advantage of the climate for freer trade, reformed their trade regimes to take advantage of market access to developed countries and taken over the manufacture and exports of ‘mature’ industrial products. There are notable differences between the two. China has spread its industrial growth across the spectrum from low to medium and a little high tech while India has focussed on medium tech, skill intensive industrial growth. China has relied on under-consumption, high savings plus a large FDI contribution and export growth while India has relied on domestic consumption growth, low FDI and moderate export growth. In this respect, a crude aggregate calculation shows that China is less capital effi cient than India. This may be due to China’s greater amount of investment in infrastructure while India has underinvested in that sector. But the rate of return on equity is also higher in India than in China. Thus the capital intensive nature of Chinese growth pattern is worrying as is its material intensity.

China’s population growth is slowing and its population may age faster than India’s. China’s gender imbalance is worse than India’s though it is bad in both countries. India falls behind China in infrastructure, in primary and secondary education, and health, but has had a relative lead on China in higher education and the ability to use English. Despite many episodes of sub-national revolts across India it has not experienced a period of excessive political volatility as China during the Cultural Revolution. The opacity of the Communist Party decision making process makes doing business in China a costly process though its dominance delivers quick results. In India, the decision process is open and slow and reversible under populist pressure.

In current discussions, it is taken for granted that this process of growth will continue. This may well be so but I wish to spend the remainder of this article to discuss some obstacles to sustained growth. 

External obstacles

At present there is a symbiosis between Western capital outflows and Asian need for investment. China underconsumes and accumulates its export surplus. The USA overconsumes and runs a capital outfl ow to fi nance its excess consumption. Since China does not recycle its accumulated surplus back into global demand, there is a perception that China is not playing fair. The consequences of this could eventually dampen Chinese growth.

Furthermore, there are geopolitical considerations that can become obstacles to sustained growth in China. It is seen as the only nation state today that can challenge American supremacy in the near future. In many arrangements such as the Shanghai process, Russia and China club together, which worries the USA: the USA-India nuclear agreement is for instance a countermove to the Shanghai process.

As far as India is concerned, its sustained growth may be seen to be under threat from external effects due to its location in a neighbourhood that has many failed or potentially failing states such as Sri Lanka, Pakistan, Myanmar and Nepal. 

Internal obstacles

India faces the challenges of inclusion with its dalits and backward castes, and its large Muslim minority. These are struggles for social status equality and economic betterment. There is a large and growing army of Maoists, the Naxalites, which exploit tribal and other marginal groups’ discontent. While this is not a long term threat, it is a substantial short and medium term problem. India has also had sub-nationalist movements over the last sixty years which have had to be dealt with and some of which, such as Nagaland and Kashmir, are not as yet solved.

For China, the lack of the rule of law is a problem. Internal unrest has taken many forms mainly in rural areas where people have found they have lost their property without proper compensation. This unrest is spreading to urban areas as well. There is religious dissent in the form of the Falun Gong and Christian groups who are demanding greater religious tolerance. Again it is unlikely that these threats are likely to cause a serious rupture to the regime but they will grow and not just go away. 

For the other two countries, there are no signifi cant external obstacles. Their problems are internal, such as the problems of status equality for groups within their populations and the overwhelming problem of inequalities of wealth and lifetime opportunities. 

Conclusion

The southern engines of global growth are a reality. They herald a new shape to the twenty-first century global economy. But one should not take their sustained growth for granted. Each country needs to pursue policies that will overcome the obstacles that are mentioned above. One thing is certain, that the half millennium inaugurated by the ‘discoveries’ of Columbus and da Gama has ended. A new millennium will see a global economy with a more balanced proportion between populations shares and income shares.​

Lord Meghnad Desai of St Clement Danes, is Professor of Economics, and Director of the Centre for the Study of Global Governance at the London School of Economics. He is a Labour party peer in Britain’s upper house of parliament.

This article is based on a keynote address delivered during the opening plenary session at the WIDER Conference on Southern Engines of Growth: China, India, Brazil, and South Africa, 7-8 September 2007, Helsinki, Finland. 

Further reading: Meghnad Desai (2008). Southern Engines of Global Growth: Very Long Cycles or Short Spurts? WIDER Discussion Paper 2008/02.