Global Growth and Income Distribution: Are China and India

Reshaping the World?

Maurizio Bussolo, Rafael E. De Hoyos,

Denis Medvedev and Dominique van der Mensbrugghe

The World Bank

Paper prepared for the WIDER project meeting on “Southern Engines of Growth”. 12-13 January 2007, Beijing, China

Motivation

1. Shift of global production towards developing countries

• Basically explained by China and India

2. Global distribution of income is changing• Between 1990 and 2005 450 million pulled out of

poverty

• Increase in the “global middle class”

China and India are Reallocating World Output

Share of developing countries in real global output (%)

0

5

10

15

20

25

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

China India Brazil Mexico Other developing

Hypotheses and Objectives

• If the present pattern continues in the next 25 years:

– How will the world’s GDP be affected by growth attainments in China and India?

– How will the global income distribution and hence the size of the global middle class be change as a consequence of future growth in China and India?

• Objectives: Analyze, in an ax-ante fashion, the effects that economic expansion in China and India will have on global growth and the global middle class

Outline

• Methodology– LINKAGE (Global CGE model)

– GIDD (model for Global Income Distribution Dynamics)

• Results for global growth

• Results for global income distribution

• Conclusions

Methodology: GIDD

Population Projection by Age Groups(Exogenous )

Education Projection(Semi- Exogenous )

New Population Shares or Sampling Weights by Age and Education

Household Survey(Simulated Distribution )

CGE(New Wages, Sectoral Reallocation )

Methodology: GIDD

Population Projection by Age Groups(Exogenous )

Education Projection(Semi- Exogenous )

New Population Shares or Sampling Weights by Age and Education

Household Survey(Simulated Distribution )

CGE(New Wages, Sectoral Reallocation )

Methodology: GIDD

Population Projection by Age Groups(Exogenous )

Education Projection(Semi- Exogenous )

New Population Shares or Sampling Weights by Age and Education

Household Survey(Simulated Distribution )

CGE(New Wages, Sectoral Reallocation )

Methodology: GIDD

Population Projection by Age Groups(Exogenous )

Education Projection(Semi- Exogenous )

New Population Shares or Sampling Weights by Age and Education

Household Survey(Simulated Distribution )

CGE(New Wages, Sectoral Reallocation )

Methodology: GIDD

Population Projection by Age Groups(Exogenous )

Education Projection(Semi- Exogenous )

New Population Shares or Sampling Weights by Age and Education

Household Survey(Simulated Distribution )

CGE(New Wages, Sectoral Reallocation )

Results: Global Growth

Sectoral Reallocation: Shift into services is more pronounced in China and India

Contribution to total output, percent

010

2030

405060

7080

90100

2005 2030 2005 2030 2005 2030 2005 2030

China India Developing High income

Agriculture Processed foods Fossil fuels Manufacturing Services

Skill premiums are likely to rise across the developing world

Ratio of skilled wages to unskilled wages

0

1

2

3

4

5

6

7

8

China

India

East A

sia

Easte

rn E

urop

e

Latin

Am

erica

Midd

le Eas

t

South

Asia

Sub-S

ah. A

frica

Devel

opin

g

High in

com

e

2005 2030

Per Capita Incomes converge, but not for all

0

5

10

15

20

25

30

35

40

45

East Asia &Pacific

South Asia Europe &Central Asia

Middle East& NorthAfrica

Sub-Saharan

Africa

LatinAmerica &Caribbean

China India

2001 2005 2010 2015 2020 2025 2030

Index: High-income=100 in each year

Note: Ratio of PPP-adjusted per capita incomes relative to high-income average. PPP is fixed at base year (2001) level.Source: World Bank simulations with Linkage model.

Methodology: GIDD

Population Projection by Age Groups(Exogenous )

Education Projection(Semi- Exogenous )

New Population Shares or Sampling Weights by Age and Education

Household Survey(Simulated Distribution )

CGE(New Wages, Sectoral Reallocation )

Results: Global Distribution

The between-countries inequality component decreases, explained, to a great extent by the catching up of China and India

The Emergence of a Global Middle Class

• Definition: Individuals whose income is between the per-capita income of Brazil and Italy, annual (2000 PPP) US$3,914 and US$16,746, respectively

• Increase in the global middle class – 2000 = 460 million members– 2030 = 1.2 billion members

• How much is due to China and India? – ½ of the total change in the global middle class (GMC) is

explained by China

The Importance of China and India in the Global Middle Class

• Growth in China and India determines the performance of the GMC

• Within-country distribution also matters

Conclusions