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Making bigger footprints By Joydeep Mukherji Sun, 4 Jun 2006, 10:10:00 China and India account for almost 40 per cent of the world's population. The size of the two countries means that prosperity for even a relatively modest share of their people has a large impact on the world, both economically and politically. China's economy has been growing at an average annual rate of 9.5 per cent for about 25 years, a remarkable achievement that has resulted in the most impressive fall in poverty in human history. India's economy has grown above 6 per cent on average for the last 25 years, and nearly 8 per cent in the last three years, also reducing its high poverty rate. The two countries account for most of the reduction in global poverty in recent decades. Their growing prosperity has spilled over to the rest of the world. China's economic growth has accounted for about 25 per cent of the total growth in world GDP in the last couple of years, exceeding that of the United States (which accounts for about 20 per cent). Although, still modest, India has contributed to about 8 per cent of the world's GDP increase in recent years, higher than the contribution of countries in Euro zone (around 6 per cent) and Japan (around 4 per cent). The recent boom in commodity prices is directly connected to growing demand from China. Higher commodity demand has had a dramatic positive impact on many countries, especially in Latin America. It is an example of how Asian prosperity is affecting a region that has been traditionally oriented towards Europe and the United States. Indian demand for commodities and industrial products is also rising and will soon exert a more visible influence on global prices. The impact of China and India on the rest of the world goes beyond growth and trade. Interest rates in the United States now depend partly on Chinese monetary and exchange rate policies. By maintaining a near-fixed exchange rate for its currency, the Chinese central bank has had to purchase more than $800 billion in foreign exchange reserves. Much of the money is in U.S. dollars and is used to purchase U.S. government and other debt, helping to contain the pressure for higher U.S. interest rates. Inflation has also been low, partly thanks to China. Prices of manufactured products have been contained because of the growth of new production in China, and the shift of production from other countries to China in order to reduce costs. That is one reason why inflation has been surprisingly moderate throughout the world despite rising prices for oil and other natural resources. While India's role in the world economy is smaller compared to China, it is also influencing global trends. Competition from service sector workers in India helps contain price rises in the service sectors of other countries, just as much as Chinese exports do for inflation in manufactured goods. Key modern industries now depend on Indian content to contain costs and to innovate. For example, the pharmaceutical and health care sectors in rich countries, as well as service providers like banks and accounting firms, depend increasingly on Indian talent for providing new services, containing costs and developing new products and treatments. The Internet would not be the same today without the presence of Indians, working both in India and abroad, in the field of information technology. Both China and India will make a bigger footprint in the world, thanks to good growth prospects and demographic trends. India has about 17 per cent of the world's working age population (aged 15-65), second only to China's 23 per cent. Over the next five years, India is projected to have the largest increase in working age population in the world, followed by Africa and then China. In contrast, the working age population is projected to stagnate in Western Europe, decline modestly in Japan, and increase by modest numbers in Middle East and Latin America. The demographic trends pose a challenge and an opportunity. Both India and China need to advance with economic reform in order to create jobs for their growing labour force. Failure to do so could result in social tensions and even political instability. Conversely, successfully integrating their growing workforce into the global production chain would bring immense wealth to both countries, especially to their poor. Richer countries, with ageing populations, could suffer from growing competition from Chinese and Indian workers, resulting in job losses. However, they could also benefit by shifting the production of more labour-intensive goods and services to China and India while recalibrating their own economies to produce goods and services that require more knowledge and other factors that are still going to be relatively more abundant in mature economies. Moreover, the fastest growing markets for industrial and consumer products, ranging from cars to entertainment, will be China and India. The rising purchasing power in the two countries offers a vast export market for firms in wealthier countries. The architecture of international institutions, such as the International Monetary Fund (IMF) or the Group of Eight (G-8), does not adequately reflect the economic and political balance of power in today's world. For example, global issues such as macro-economic imbalances (huge current account deficits in the U.S. and surpluses in China) or rising energy demand cannot be addressed exclusively by the present members of the Group of Eight, the International Energy Agency, or the largest shareholders of the IMF. They require China and India to be at the table. Similarly, poverty reduction and meeting human development targets depend to a large extent on just two countries. The process of incorporating the world's two largest countries into the global economy, and with its political and institutional framework, may not always be smooth. India is a politically open society that is slowly embracing the market economy. China is a politically closed society moving from a semi-market to a market economy. India has already developed a stable system for changing governments, solving China's biggest challenge. China has done more than India in creating prosperity for its people. China may achieve First World status before India but it will have to avoid a political hard landing."