Vrutti Tanna | Neha Amlani | Yash Aryan | Vishal MishraSuman Kumar | Tanya Rastogi | Vaibhav Vyas | Vivek VoraNiharika NandiniECLIPSE Living in the shadow of chinas economic dominance

Submitted To: Prof. Nasheman Bandookwala

Chapter-1 : A BRIEF HISTORY OF ECONOMIC DOMINANCE.

Suez crisis of 1956Suez canal construction in 1859 owned by FrenchInsolvency of Egypt in 1875UK acquired suez canal but later became net debtorEgyptian president nationalized suez canal in 1956 UK ,Israel and France attacked and Egypt responded by sinking all ships and vessels in suez canalOil tanker traffic was blocked

Oil prices increased and it led to inflation in UKUK turned to US for financial assistanceUs supported with $1.3 billion IMF and $500 million loan from export-import bank4 main aspects were highlightedEconomic means to secure noneconomic objectivesDominant countries have political , economic and military powerTo secure national objectives of other countryUS not just used stick but carrots to change outcome.

Chapter-2 : Quantification and Validation of Economic Dominance

Quantifies economic dominanceIntrinsic value and instrumental value-economic and noneconomic outcomes.Outcomes can be national or systemicVarious areas of economics are included such as resource , trade , finance and currency.Aim is to study economic dominance of next 20 years.Quantifying economic dominance by constructing an index

5 principles for quantification should be taken into considerationBalance between indiscriminately inclusive and objectionably selectiveData should be easily availableProjecting the variables over 20 year time horizon in order to predict futureReasonable and justifiable basis for weighting the variables and computing index.Validate the whole business through various ways.

4 StepsList all possible determinants of economic dominance.Narrow the list and consider only some determinants.Issues in measuring index.All variables are weighted in order to construct index and validated in different ways.Useful attempt is made to understand economic dominance.

Chapter-3 : Quantifying Currency Dominance

Definition: An International Currency is simply one that is used outside once own country. The greater the use, the more it merits the description of a reserve currency.Benefits and Costs to the country issuing the Reserve Currency:Benefits:Convenience for the countrys ResidentsSeigniorage or Exorbitant privilege in good timesSeigniorage or Exorbitant privilege in bad timesPolitical Power and Prestige

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Costs:Exorbitant curse, not Exorbitant PrivilegeVulnerability from Exorbitant PrivilegeBurden of ResponsibilityCostly Pre-RequisitesShort History:The dollar made its first experience as a reserve currency in the interwar years. In this period, the pound and the dollar accounted for a roughly equal share of reserve holdings. According to estimates in Robert Triffin, The share of Sterling in World foreign exchange reserves was higher than that of the dollar until 1954. Thereafter the dollar's share rose steadily, reaching 65 percent in 1973.

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The German mark and Japanese yen started featuring more prominently official reserve holdings from the mid 1970s onward, with a corresponding decline in dollar.In 1970, a new reserve currency was issued by the imf called the special drawing right. This action was in response to the belief, spawned by the analysis of triffin, that there could be an inherent shortage on international liquidity. The solution therefore was to create a synthetic reserve asset, the SDR, to supplement the supply of the reserve currency and gold.

What determines reserve currency status?To be an attractive store value on the issuing country should have low and stable inflation as well as a stable and relatively strong exchange rates.The more transacted a currency is, the more there will be an incentive to use this currency as a medium of exchange and as a unit of account, and hence the more it will be transacted.

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Chapter-4 : Forces driving dominance: convergence and gravity

CONVERGENCE- the idea of convergence in economics is the hypothesis that poorer economies per capita incomes will tend to grow at faster rates than richer economies. As a result all economies should eventually converge in terms of per capita income. Gravity- gravity is just like gravity model of international trade in international economics, similar to other gravity model in social science, predicts bilateral trade flows based on economic sizes (using GDP measurements) and distance between two units. Simply we can say that it is only shifting of global economys hub.

Shifting in economic dominance seems to possible because in year 2007 financial crisis started in continents like Europe and united states, and that is called recession period in economy. At the time of recession, all the European and American century was struggling with losing job, unemployment, production low either the cost of production was increasing. That give the birth to the sifting of aggregate demand and that period is called supreme crisis. Convergence and gravity help quantify future GDP and trade comparing the period when the united states become largest economy (around 1870).why convergence and gravity?

chapter deals with This chapter deals with projection like future economy and currency dominance , which is driven by economic convergence whereby poor countries catch up with rich ones. By gravity whereby trade between countries determined by their gdps . convergence and gravity help quantify future gdp and trade. This chapter shows that convergence, which was selective until recently, has become much broader in scope and faster in pace.

THE FIRST PHASE (13000BCE TO 1000CE) - this period is called Malthusian stagnation. the life was in the words of Thomas Hobbies ,poor, nasty, brutish, and short. THE SECOND PHASE (LATE 1700s) - the decisive break from subsistence started after the middle ages, culminating in the industrial revolution of the late 1700s.this industrial revolution created also the great divergence whereby the west the United Kingdom and its western offshoots- embarked on a trajectory of consistently upward improvement in living standards while the rest lagged behind. The great divergence marked the second phase of human economic history and continued, with some exceptions, until world war-2.

different phases (ERA) of economic history (convergence of the previously poor)

THE THIRD PHASE (AFTER WORLD WAR-2) - the third phase starting after the end of world war 2. A group of countries like japan and Germany started growing faster in per capita terms than richer countries. In between 1950s to 1970s several poor countries like Taiwan, Korea, Singapore, Hong Kong, Malaysia, Indonesia etc, this converging performer was then follow by the two largest countries china and India with the potential to become systemically important. In some way, china and India were latecomers to the catching up process.THE FORTH PHASE (after rescission) - we can say that world has now entered in a fourth phase of economic history. In the decade and a half preceding the recent global economic crisis, a much greater number of countries in Africa, Europe, Latin America, and Asia have started growing much faster than in the past and much faster than the industrial countries. Continue

According to data sources which I mentioned above during 1870-1960, two nonoil developing countries (of a total of 38) grew faster, than the united states (the benchmark for convergence analysis). In the next phase (1960-2000), 21 out of 72 countries converged towards us income levels, with narrowing the gap rate of 1.5 percent per year. Out of this analysis the best collective performance was the year of 1970s when 38 out of 87 countries exceeded us growth rate by an average of about 2.5 percent.

ANALYSIS OF CONVERGENCE AND GROWTH RATES OVER TIMES (1870 2008) WITH SOME DATA BASED ON SOURCES (MADDISON, PENN WORLD TABLE, and WORLD DEVELOPMENT INDICATORS)

According to data sources which I mentioned above during 1870-1960, two nonoil developing countries (of a total of 38) grew faster, than the united states (the benchmark for convergence analysis). In the next phase (1960-2000), 21 out of 72 countries converged towards us income levels, with narrowing the gap rate of 1.5 percent per year. Out of this analysis the best collective performance was the year of 1970s when 38 out of 87 countries exceeded us growth rate by an average of about 2.5 percent.

Measuring GDP level and growth rates: purchasing power parity estimates

This of course, will not just be true of group of countries, but also individual ones. In particular, the economic dominance and hegemony of the united states will be under challenge from the rising china. the recent global financial crisis may end up accelerating some of tends but the crisis will not be the underlying cause for sifts. A key massage is that the dominant west will have to start readjusting to the new reality pf reality of relative but not necessarily absolute declineConclusion

CH: 5 PROJECTING ECONOMIC AND CURRENCY DOMINANCE

INTRODUCTIONFORECASTING ECONOMYCURRENCY LEADERSHIPRELATIVE ECONOMIC DOMINANCE OF CHINA

Using IMF weights the economic size will shifted dramatically in favor of china in 2030 compared with 14.5 % for the U.S as the chinas per capita GDP will be about half that of the U.S by 2030.

Using reserve currency weights up to 2030 china will account 15% of world trade twice that of U.S

There is question of prosperity in determining dominance which is measured by a countrys per capita GDP as it may or may not play a role in determining dominance .

This projections have not considered Europe as a potential candidate for dominance where its recent crisis has raised questions , so arvind includes Europe union as a single political unit

The renminbi could be in a position to rival the dollar within the next ten years , trade is a significant determinant of reserve currency status combined with chinas growing trade dominance portend strongly for the yuan as suggested by the trade projections in chapter 4.Chinese economic dominance is more imminent and more broad-based encompassing , output , trade , and currency-than currently recognized

Chapter-6 : A HISTORICAL PERSPECTIVE ON CHINAS DISTINCTIVE DOMINANCE

Why dominance cannot be wielded by a poor country.A country must be socially stable and higher standard of living.

A poor country might not be able to raise the resources- at least on a sustained basis- for the power of projection internationally.

A poor country may not have the "soft power" attributes (such as democracy, open society) for dominance.

To become a super power, a country must be economically and technological rich.

Chapter-7 : GUARDING AGAINST RASH PROPHESYING

Chinas Growth- It focuses on three factorsPoliticsPricepeopleLooking BackRealism of Trade projectionsGravity ModelConclusion

Chapter-8 : Economic cooperation with a rising China

Prospectus for Cooperation Leading up to Chinese HegemonyDemise of Chimerica (Self Interest rather than external influence)Likely demise of MercantilismReasonably strong Chinese stake in an open trading SystemExchange & Reciprocity as determinants of the Efficacy of the World Trade Organization

Some Terminologies

Chapter-9 : China As The New Raison dtre for Reviving Multilateralism

Multilateralism:The practice of promoting trade among several countries through agreements concerning quantity and price of commodities, as the Common Market, and, sometimes, restrictive tariffs on goods from outsiders.

China is communist ruled country.Their government has large restrictions and control over each industry and trade.Chinese govt. bought some economic reforms in past but they should bring more reforms and try to decontrol some trade and industries.

Further opening of Chinese market and preventing deliberalisation of it, is main concern of countries that has trade agreement with china. As a WTO member, china is more open in trade rules but more close in policy terms especially outside traditional goods, thus giving control of large economic activity to government only.Due to this, in trade agreement, other countries have very limited bargaining power over china.Big countries like USA, UK can control bargaining in future with threat to close their market for china, if china does not bring some economic reforms for opening of market.

If emerging countries like mexico, brazil, India expresses their concern with china, supporting USA, market reforms can be more promising.Chinas trading partner should force it to agree on multilateralism.if more country will enter in bilateral agreement with china, they will exposed to chinas increasing dominance over trade. But this multilateral agreement should happen between other countries too, otherwise china will be left out if other countries enter in free trade zone agreement with each other.

Other way is promiscuous bilateralism.In this both country negotiate until common goal is achieved and market is equally open on both side. But this will stop liberalization in china.Another option is hostile bilateralism by big trading partners like USA, and Japan.They will enter into bilateralism but exclude china, thus pushing more reforms.But china can then enter into agreement with emerging countries and gain profit thus reducing effect.One more option to reduce chinas economic dominance is Asian countries forming union to trade with china, thus reducing chinas bargaining power. Countries like India, Japan, Indonesia, Singapore, Malaysia.

China can also gain dominance by undervaluing currency and proved de-facto.It will thus impose export subsidy and import tariff, so chinas market will be more closed than even before.To stop chinas economic dominance, collective action and strategic forbearance is required.Usa and India together can also create china-focused multilateralism, to motivate other countries to enter in multilateralism with china.Due to its institution structure, usa can dominate china by first inviting for trade and then negotiating reforms not but govt. But by congress.

India is essential spokesperson and intellectual leader to many developing countries also known as G-77.But Indias dependency on china in manufacturing sector, makes India weak on bargaining in trade agreements. Because of border sharing with china, India choose not to enter in multilateralism with USA and chin, but it makes India and also other countrys command weak over china trade market.Only way possible and best outcome is all country multilateral system with china, thus every country is forcing china for reforms or closing all market for china.

If Chinese currency renminbi becomes international currency then chance is that china have to maintain good relation in trade to maintain prestige.But history suggests that world cannot rely on china, and china can even start world war situation if economic dominance is not stopped.Only best way to stop chinas dominance is all country(usa, India, Japan, UK, and other emerging countries) creating and strictly following multilateralism system with china. They need to remove affection towards short terms gain in bilateralism and forcing china in multilateralism.

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Arvind Subramanian is currently the Chief Economic Advisor of Indian GovernmentHe has also served as senior fellow at the Center for Global DevelopmentHis role is primarily to produce the Annual Economic SurveyHe is a widely cited expert on the economies of India, China and the changing balance of Global Economic PowerHe also plays an important role in monitoring the Fiscal policy and Tax Reforms

ARVIND SUBRAMANIAN

According to the Author, China is expected to become the economically dominant country by 2030With the inclusion of Renminbi in IMF, it has laid a Roadmap for China in becoming a Super PowerThe transition of Economic Power is depictedThe factors that makes a particular country Economically DominantChinas Trade, Currency, Military strength, Resources availability, Wealth, External Financial StrengthArgues in relation to this

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