The World Under Pressure: How China and India Are Influencing the Global Economy and Environment

The World Under Pressure: How China and India Are Influencing the Global Economy and Environment

by Carl Dahlman

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Product Details

ISBN-13: 9780804786935
Publisher: Stanford University Press
Publication date: 12/12/2012
Edition description: New Edition
Pages: 325
Product dimensions: 5.90(w) x 8.90(h) x 0.80(d)

About the Author

Carl J. Dahlman is the Luce Professor of International Relations and Information Technology at the Edmund A. Walsh School of Foreign Service at Georgetown University. He joined Georgetown in January 2005 after more than 25 years of distinguished service at the World Bank.

Read an Excerpt

The World Under Pressure

How China and India Are Influencing the Global Economy and Environment


Copyright © 2012 Board of Trustees of the Leland Stanford Junior University
All right reserved.

ISBN: 978-0-8047-7713-1

Chapter One

Rising Powers

THE ECONOMIC RISE OF CHINA AND INDIA since the 1980s is unprecedented in its speed and breadth. These giant countries, which today represent nearly 40 percent of world population, have increased their share of global economic output from 4 percent in 1980 to 18 percent in 2010 in terms of purchasing power parity (an economist's adjustment for what money can buy). Over the same period, their share of global trade has increased from 1 percent to 12 percent. Their rapid entry onto the global stage is creating frictions in trade, finance, foreign investment, intellectual property rights, and competition for natural resources—not to mention concerns about climate change, global governance, security, and balance of power. The world needs to accommodate the rise of these two countries; that much is clear. But this will require difficult adjustments by all major powers, including these two swiftly rising countries themselves. The question is whether the world can accommodate these ascending giants without the aforementioned tensions escalating into major economic and power collisions.

Why This Book? The rise of These Two Powers Is Stressing the Global System

There are many books on the growth of one or both of these countries. however, none have taken as broad a view of their rise as this book seeks to do, while developing the implications of such a swift upsurge for the global system. Another unique aspect of this book is its historical perspective combined with an appreciation for a new binding global constraint—the limited capacity of the environment to absorb increased CO2 emissions that are a by-product of economic development because of our reliance on fossil fuels.

Taking a historical view, the speedy development of other countries is not encouraging. Fast-paced changes in economic and political power have typically led to strong hostilities that have tended to spiral into power struggles translated into trade, resource, and ideological wars as well as military conflict. Historically, the world has not faced the environmental constraints that we do. We need to limit the absolute amount of CO2 emissions to avoid climate change, and this brings a new binding constraint to the swift ascent of China, India, and the world.

The focus of this book is not on the military or security threats from the growth of these two countries but on the implications of their growth for the global economic system and their impact on the environment and geopolitics. It does not delve into the military and security issues except as a by-product of the two countries' increasing economic size and impact on the environment.

Although the book covers both China and India, the challenges that they pose are qualitatively and substantively different. The biggest and most immediate challenge is posed by China. Its population is nearly a sixth larger, its economy almost three times the size, and its merchandise exports nearly eight times those of India. China uses three times as much energy and emits four times as much CO2 as India. At current rates of growth in purchasing power parity terms, China will have as big an economy as the United States by 2016. In nominal terms, it is likely to be as big as that of the United States by 2020, once adjustment is made for a gradual appreciation of its exchange rate. It will take India more than four times as long to match the size of the U.S. economy. Furthermore, as an authoritarian, one-party state and hybrid socialist/ market economy, China has a different political and economic model from the West, Japan, or India, and its expansion creates an additional concern in terms of geopolitics and ideology.

India is included in our analysis because, if it continues to grow at its recent rate, in about 10 years it will be putting pressure on the global system in the same ways China does today. In 40 years, India may also surpass the United States in economic size, and that will further complicate the dynamics of global power. In addition, there is a risk of collision between China and India over water, possibly other resources, and perhaps economics and ideology. Therefore, focusing on China is not enough. Our story is about two powers that will each shift the global balance on a number of fronts during time frames that overlap and extend over the next half century.

Economically, the world faces competitive pressure from China's increasing exports. Although China's competitive export growth provides consumers with the benefit of low prices for manufactured products, this expansion is displacing workers and companies in developing and developed countries alike. Between 1980 and 2010, China's share of the world's merchandise exports increased from less than 1 percent to 10 percent. No country has had such a massive entry into the global economy in as short a time. In the context of high unemployment and low growth in developed countries, there are growing complaints about currency manipulation and protectionist sentiment against China.

India is pressuring developed economies not with merchandise but with information-enabled service exports. This raises concerns about the off-shoring of knowledge-intensive jobs from developed countries to India. There are also concerns that both countries are growing faster by copying and pirating technology from the rest of the world. Their expanding innovation capability, based on an increase in the number of scientists and engineers and money allocated to research and development, is also influencing their competitive strength, although China is much further along than India. Both countries are becoming important homes to, as well as sources of, direct foreign investment. One question in the world's marketplace is whether they are attracting foreign investment that may have gone elsewhere. Since they are buying natural resources and high-technology companies abroad, another key question is one of security in terms of access to resources, as well as strategically important technology residing in more developed nations.

Environmentally, these two countries' enormous resource needs are a sore subject, as both are resource poor on a per capita basis. Their large demand translates into windfalls for commodity exporters but rising prices for other commodity importers. World competition is particularly strong for energy resources and, between China and India, for water. however, the more significant collision with the environment is not over resources; the main sticking point is CO2 emissions. If business continues as usual, the CO2 emissions of China, the United States, and India will be greater by 2035 than the whole world's emissions in 1990. The Kyoto targets are to cut total global emissions below the 1990 level if the irreversible levels of CO2 for disastrous global warming are to be avoided.

The friction over CO2 emission stems from the fact that today's rich countries developed without paying for the CO2 they created. China and India do not want to commit to quantitative limits because the additional costs of reducing CO2 emissions would slow their growth. They argue that it is unfair to make them pay for a problem created by developed economies whose per capita incomes are 16 to 40 times higher than theirs. Since China, the United States, and India have not formally committed to reducing their emissions, there has not been much progress on a global agreement to deal with the problem.

Some countries, like the United States, are considering legislation that would put a border tax on the carbon content of products from countries like China and India, which are not considered to be doing enough to reduce CO2 emissions. If such legislation were adopted, there would be an increased risk that trade tensions would escalate to the point where there could be a breakdown of the global trading system into regional blocs.

Structure of the Book: review the Past to Get Insights into the Present and the Future

Now that we have looked at the chessboard of the world from a bird's-eye view, we will traverse the potential conflicts that we face at the ground level in the hopes of understanding our landscape better and beginning to chart a viable course. The structure of this book is as follows. Chapter 2 focuses on what we can learn from the history of global power shifts. It includes a review of some theories of power shifts, noting additional complexities introduced by the binding global environmental constraints of our day, greater global interdependence in trade and finance, the globalizing activities of multinational companies, and the power of the Internet. It also traces previous changes in the global economic, trade, financial, and underlying technological systems.

Chapter 3 addresses why China and India have been growing faster than the rest of the world for the last 30 years. It considers some similarities and differences in their histories and economic policies to explain their growth rates, the sources of their strengths, and their impact on the world. A large part of their growth is because of how they have leveraged technology that was obtained formally or informally from the rest of the world. In many respects, both countries, but particularly China, are out to regain their former status and prestige and to avenge the humiliation they were forced to endure in the nineteenth century when they were exploited by Western powers.

Chapter 4 explores their growth prospects over the next 20 years. What are the main challenges? how successful are they likely to be in addressing these daunting challenges? although predicting the future is hazardous and there are always unforeseen events, this chapter concludes that China and India are likely to grow much faster than the rest of the world for the next two decades unless there is a strong protectionist reaction or some major unforeseen disruption. They will also increase their competitiveness because they are strengthening their innovative capability by investing in higher education and research and development (R&D).

Chapter 5 homes in on the economic frictions that China's and India's rapid growth raises for the world. It discusses the positive and negative impacts on other countries through their trade. This includes an analysis of the symbiotic relationship of the financial imbalances between the United States and China that have resulted from China's large trade surpluses and the U.S. deficits, the controversial issue of exchange rates, and the complex issue of the U.S. dollar as the reserve currency. It also analyzes the frictions resulting from the bigger role of both countries as hosts to direct foreign investment as well as in buying up natural resource and high-technology companies in other countries. It analyzes the competitiveness problem created as companies in these two countries copy and steal technology from foreign companies. Finally, it also notes the shifting geopolitical balance between countries with democratic and market-oriented regimes and those captivated by the attractiveness of the authoritarian Chinese model of government and state market relationships.

Chapter 6 explores environmental frictions resulting from the two countries' swift growth. It focuses on their relative resource scarcity, their energy needs, and CO2 emissions in particular. It also explains that the world is deadlocked over CO2 emissions because the problem is a zero-sum game. Unless this deadlock can be broken, there is a risk that there will be negative fallout from climate change. The chapter argues that the most straightforward way to break this deadlock is through a major push for more sustainable energy technologies, but that is not happening because not enough resources are allocated to energy R&D. Finally, it points out that the pressures on the environment from the quick development of China and India are a precursor to the pressures that will come as the rest of the world develops. Thus, it is necessary to find more environmentally sustainable development strategies and start helping developing countries implement them rather than copying the energy- and resource-intensive strategies of the developed economies.

Chapter 7 summarizes the shifts in power that are taking place and the friction they are generating. It argues that the existing international system is not able to deal with these tensions. It was designed after World War II for a different configuration of power, is not able to handle new stresses within the traditional areas, and is even less able with the new binding environmental constraint. There is a risk that these frictions could lead to more serious confrontations, including trade wars, ideological wars, and even conventional wars. Here the short-term pressure is coming from the rise of China, which is on track to become the largest economy within a decade in virtually all dimensions of power except military.

The problem with China's rapid rise is that it has been free riding on the global system—enjoying the benefits of the system while not paying the costs and not following some of the rules. The main problem is its trade strategy, where it has been manipulating its currency to strengthen its cost advantage. Free riding also extends to copying and stealing technology from the rest of the world. In addition, China is using access to its large and dynamic domestic market to get foreign companies to divulge their technology. It then helps its firms use the technology to their competitive advantage, including even exporting the products to other countries. China is also free riding by not doing enough to maintain other aspects of the international system—for example, controlling nuclear proliferation.

The rise of China, accelerated by free riding on the global system, is a major challenge for the United States, which was the main architect of the current system and its strongest power. On the environment, this is further complicated because, like China (and India), the United States is also free riding on the environment by not paying for CO2 emissions. Chapter 7 uses the insights from Chapter 2 to argue that together with the European Union and Japan, the United States needs to engage China to work out a new set of rules and mechanisms that can address the key imbalances and threats and also help create more sustainable development strategies for countries that are being left behind by the more competitive and demanding global economic system.

Because there is much uncertainty about how the world will evolve, Chapter 8 develops three alternative scenarios to help think through the challenges. It argues that the current unsustainable and uncooperative global system could lead to economic tensions between a stronger China and its area of influence and the United States and other similar-minded countries, as well as the negative consequences of climate change due to a lack of shared commitment to curb global CO2 emissions. An alternative scenario is similar on the economic side but foresees the challenge of global climate change being temporarily solved by some unilateral geo-engineering move by a capable power such as China or India. The most desirable scenario—that of global cooperation to maintain an economically integrated and environmentally sustainable global system—is imaginable but difficult to attain. The chapter also considers the scenario of the impact of a major economic collapse in China. The negative consequences of that scenario make clear that China already is central to the global economic system and reinforce the desirability of working out cooperative solutions.


Excerpted from The World Under Pressure by CARL J. DAHLMAN Copyright © 2012 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of STANFORD UNIVERSITY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

List of Figures xi

List of Tables xiii

Preface xv

Acknowledgments xvii

List of Abbreviations xxi

1 Rising Powers 1

Why This Book? The Rise of These Two Powers Is Stressing the Global System 1

Structure of the Book: Review the Past to Get Insights into the Present and the Future 4

2 Insights from History of Power Shifts and Growing Interdependence 8

Conflicting Theories Provide Relevant Perspectives 9

This Book Uses a Broad Framework to Analyze and Track Power Shifts 14

2000-Year Overview of the Rise and Decline of Power Shows Frictions Spiral into Wars and Changes of the Global System 38

There Have Been Significant Shifts in Economic Size Even in the Last 30 Years 41

Conclusion: The History of Power Shifts Is Not Reassuring 42

3 Understanding the Rapid Rise of China and India 45

Basic Comparisons 46

Some Similarities in Otherwise Very Different Histories 48

A Macroaccounting for the Differences in Growth 50

The Type and Role of Government 53

Two Contrasting Growth Strategies 56

Acquiring Technology from the Rest of the World 65

Conclusion: Both Countries' Growth Is Largely Driven by Technological Catch-Up and Participation in the International System 71

4 Positive Growth Prospects for China and India 74

The Impact of the 2008-2009 Financial Crisis on China and India 75

Long-Term Projections for Growth of China and India 76

China and India Face Daunting Challenges 79

Both Countries Are Increasing Their Competitiveness 93

Part of Their New Competitive Advantage Is Their Growing Critical Mass in Higher Education 94

They Are Also Moving from Imitation to Innovation 99

Both Countries Are Likely to Continue to Grow Much Faster Than the World Average for the Next Two Decades 109

5 Growing Economic and Geopolitical Impact 112

Positive and Negative Impact Through Increased Trade 113

From China's Trade Surpluses to Global Imbalances 126

Growing Foreign Direct Investment (FDI) 135

A Tilted Technology Playing Field 143

Growing Geopolitical Impact of the Rise of China 149

6 Environmental and Natural Resource Impact 154

China and India Are Resource Poor 155

The Rapid Growth of China and India Combined with Their Large Populations Is Creating Global Environmental Sustainability Problems 161

China and India Will Account for the Majority of Global Increase in Energy Demand and C02 Emissions from 2008 to 2035 163

There Is a Stalemate on Action to Deal with Climate Change Because It Is a Zero-Sum Game 171

Technological Innovation Is a Way to Break the Climate Change Deadlock, but Not Enough Investments in R&D Are Being Made 175

There Is Also Increasing Pressure on the Environment from the Growth of Other Developing Countries 180

Power Shifts and Rising Frictions Have Implications for the Global System and the United States 182

The Rapid Rise of China and India Is Putting Pressure on the Global Governance System 183

Growing Friction Areas Are Beyond the Current Capabilities of the International System 183

Risks That Frictions May Lead to Greater Problems 189

Evolution Within the Existing System or the Rise of a New System? 198

What Can/Should the United States Do? 205

8 How Will the World Adjust to the Swift Ascent of China and India? 209

Alternative Scenarios 209

Moving Toward a More Sustainable System 214

Implications for Other Developing Countries Vary 229

Conclusion: The Main Powers Need to Take Stronger Actions to Ensure a More Sustainable and Equitable Global System 232

Notes 235

References 275

Index 291

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