Changing Fortunes Of Asia

Dominance of Asia
For the period between 1 AD to 1800 AD, Asia was the biggest economy in the World. This was due to its large population, demand of its products say of spices, textiles and higher agricultural yield. The economic leadership of the continent remained in the hands of China and India.. This was not a leadership on per capita basis though. By and large, living standards remained at subsistence levels for the majority of the world's population until the middle of the 18th century. Before 1800 income per person —the food, clothing, heat, light, and housing available per head—varied across societies and epochs. But there was no upward trend. The short-term gains in income through technological advances were lost through population growth, resulting in no significant changes in living standards

Rise of West led by Europe
However Europe underwent significant changes from 14th century onwards with the start of Renaissance. The spirit of scientific temper, rationalism started triggering scientific and technological changes, also helped by the great voyages. There were changes in politics and society as power of feudal states and religious institutions declined, the advantages due to birth were challenged, concept of private property and commercial contracts emerged while modern banking and financial institutions came into existence. All this aided the Industrial revolution which saw unprecedented changes in production efficiency.

Many European countries e.g. Italy, Portugal, France and England, Holland etc developed strong navies which helped them take control of global trade. As per Andus Maddison’s study between 1820 to 1870 at 1990 prices on PPP (Purchasing Power Parity which measures the buying power) basis, GDP of Europe, USA, Canada, Australia and New Zealand ballooned from $ 238 billion to $ 611 billion while it stagnated for Asia at around $ 411 billion. West’s hour of glory has arrived and its economic and political clout increased dramatically. The West was led by England who created the biggest empire of human history, an empire where the Sun would never set

Change of guard at West to United States
In the first half of 20th century the internal contradictions of Imperialism led to two World Wars. They decimated the international clout and economies of Europe. At the beginning of 20th century, USA became the economic leader of the world. British foreign direct investment and the diffusion of technology spread industrial development to the European continent and North America leading to greater international competition.

The advent of manufacturing especially steel and chemical industries, which enjoy economies of scale helped USA as compared to Europe. United States invested in and benefitted from technological advances in transport, automobiles, communications, electrical appliances, chemical products etc. As per Andus study in 1950 on PPP basis at 1990 prices, GDP of Western Europe was was approximately $ 1.4 trillion while that of USA was $ 1.46 trillion. Its per capita income was double to that of Western Europe. Towards the middle of 20th century, War weakened Europe found it impossible to retain colonies which started gaining independence. In fact Western Europe had to take USA’s economic help through Marshal Plan and military shield through NATO to survive

Rise of Asia led by Japan
The period from the end of World War II to the early 1970s was a golden era of economic growt for United States as well as rest of the world. The Asia was getting liberated and its social political systems were maturing. Asia is rich in natural resources and colonialism imparted scientific and technological knowledge. The most dramatic turnaround in this period was enacted by Japan. Japan started industrializing during Meiji period in 19th century. It defeated Russia in naval warfare in 1905 shattering the myth of European supremacy. Japan had an industrialized work force from pre World War II days though its infrastructure was destroyed during the War. After the War, helped by United States, major investments were made in electric power, coal, steel, and chemicals. Its high savings rate, literate, hard working and docile labour force and a spirit of nationalism propelled GDP rates to above 8 per cent in 50s and 60s. It became world’s second largest economy in 1968.

Some smaller Asian countries e.g. Hongkong and Singapore also grew. At the same time West Asia also started benefitting from the export of oil. Per capita income of Saudi Arabia, Kuwait, Qatar and UAE became similar to that of advanced economies. By 1975 Asia accounted for a quarter of world’s GDP on PPP basis

Emergence of China
Easy availability of credit in Japan created speculative stock market and property bubbles. Investments in neighboring countries turned them competitors. The same nationalistic spirit started hurting efficiency and government’s control stifled internal competition. Japan went into stagflation in 90s from which it is yet to come out. Its ageing population is further dragging it down.

Under the leadership of Deng Xiaoping, China initiated economic reforms in 70s and 80s. Being a communist country has helped it implement the land reforms earlier. Unlike many countries, China started to reform the agriculture first. In 80s and 90s, the reforms focused on privatization and the lifting of price controls, protectionist policies, and regulations. It also actively started inviting foreign investment. A social contract for unlimited economic opportunities in return for limited political freedom was stitched. Market increasingly started playing a bigger role than state. As per its National Economic Census, from 1978 until 2013 unprecedented growth occurred, with the economy increasing by at least 7.5 per cent a year for most of the period.

Today China has became World’s second largest economy in nominal terms and the largest in PPP terms. It has taken over economic leadership of Asia from Japan and may become world’s largest economy in 30s. The last quarter of twentieth century also saw rise of Asian tiger economies, a term used to refer to East Asian countries like South Korea, Taiwan, Hong Kong, and Singapore. They were joined by Indonesia, Malaysia, Thailand, and the Philippines. By 2000 Asia accounted for two fifths of world’s GDP on PPP basis.

Potential for India
Recently concerns have started emerging over the future of Chinese economy. Its total debt is more than twice its GDP. It is undergoing restructuring and changing its growth model from export led to internal consumption based. Its currency and stock markets continue to be volatile. Its growth rate is unlikely to exceed 7 per cent in the next few years. It could be struck in middle income trap unable to move beyond a middle income economy.

The country most likely to take economic leadership of Asia is India. It is democratic, has relatively young population, rich is natural resources, has a diversified industrial base. It needs to improve quality of human capital including basic literacy and skills, mortality rates, general health. It needs to initiate structural reforms in economy including disinvestments in public sector units, taxation reforms, labour reforms, make it easier to get environmental clearances, land etc. Most importantly need to build a political consensus for developmental politics.

A PriceWaterHouse study of 32 economies that constitutes 84 per cent of world’s GDP suggests that 3 out of the top 5 economies by PPP in 2050 will be from Asia. Asia’s clout is increasing in world fora such as UN, IMF, World Bank etc. It is also creating its own institutions e.g. Asian Infrastructure Investment Bank etc. By all means Asia’s share in world’s GDP will be more than half in 2050. But like before this dominance will be mostly due to its large population and not per capita basis.