Why Are China and India Reshaping the Global Economy?

In this IBKR Podcast episode, Elizaveta Gridneva from Interactive Brokers Hong Kong and Steven Barnett explore the shifting balance of global growth and the rising influence of major Asian economies. They also break down the forces behind changing trade patterns, domestic demand and long-term development trends shaping the world economy.

Summary – IBKR Podcasts Ep. 397

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Elizaveta Gridneva

Welcome to this edition of IBKR Podcast. My name is Elizaveta Gridneva. My guest is Steven Barnett, Professor of Practice at Hong Kong University and the former division chief for China at the International Monetary Fund. Actually, to be more specific, uh, Steve, you spent 28 years at IMF, and five last of them you spent as IMF Senior Resident Representative to China, which is essentially being an IMF ambassador to China. This is truly impressive career track, and thank you for joining us today. 

Steven Barnett

Oh, well, thank you for having me. It’s really my pleasure to join you today. 

Elizaveta Gridneva

Thank you. Great having you. So you argue that, uh, global growth is increasingly driven by China, India, and the ASEAN 5. What’s the simplest way to explain that shift to listeners? 

Steven Barnett

Sure. I mean, I think the simplest way is to actually just start with the facts. If we look last year, this group, China, India, and the ASEAN Five, accounted for over half of global growth. This year, the IMF thinks it’s gonna be the same, over half. And even if you go out to 2031, the last year of IMF forecasts, still the same. This group of countries and economies will account for over half of, uh, global growth. There’s sort of a philosophical question: How do you measure growth? Let me not get philosophical as to what is global growth, just to say that the way the IMF does it is it does a weighted average of individual economy growth rates, where the weights are based on PPP, which is purchasing power parity. So how do we get this result? Basically, these Asian economies are growing very fast. 

Elizaveta Gridneva

Understood. And you’ve shown that actually China and India account, uh, for a very large share of global growth, and that, uh, adding to the ASEAN five countries that you mentioned, uh, that are Indonesia, Malaysia, Philippines, and Singapore, Thailand, pushes this group to well over half. Why you think this group become so dominant? 

Steven Barnett

Yeah, I mean, I think the short answer is they’re basically star performers, and these economies have been growing, you know, much faster than the rest of the world. So, for perspective, last year the world grew at 3.4%. Amongst this group, India grew at 7.5%, China grew at 5%, and then the ASEAN grew at 4.5%. So all of these economies are growing faster than the global economy. So I think, you know, we really see this region as very dynamic, and Asia in general has continued to be a relative bright spot in the global economy. 

Elizaveta Gridneva

And you describe this as a story of size and speed. Uh, could you please unpack that? Why those two forces are so powerful in driving global growth? 

Steven Barnett

The short answer is the mechanics, that it is the size of the economy multiplied by how fast it grows that gives its contributions to growth. But that’s kind of a boring story. Let me give some examples which might help illustrate it. And let’s take Vietnam. I was recently in Vietnam, a really dynamic economy. In fact, if you look back over 25 years and you stick to just the 50 largest economies in the world, Vietnam’s been the second fastest growing. Uh, number one is China, so Vietnam is, uh, number two. So Vietnam grows very fast. It grew 8% last year. But Vietnam is relatively small relative to the world economy as a whole. And so Vietnam’s contributions to growth, to global growth, was about less than 0.1. So global growth was 3.4. Zero point one percentage points, actually a little bit less, came from Vietnam. So even though Vietnam grew very fast, it’s a relatively small share. Another example is China and India. So India now is the fastest growing big economy. Seven and a half percent last year versus 5% for China. However, China is a much larger share of the world economy. So China actually contributed more to global growth than India. So China contributed one percentage point of the 3.4% growth last year. And India, even though it grew faster, contributed around 0.6. 

So again, it’s the size and speed. India’s growing faster, but it’s a smaller share of the world economy. So those two things together is what gives us the contributions to growth. 

Elizaveta Gridneva

Great. Thank you for that, um, analysis. It’s really interesting insights. So now we understand if the center of global growth have shifted towards, uh, emerging Asia, how sustainable is that relative to the advanced economies, in your opinion? Uh, because those economies are growing more slowly recently. 

Steven Barnett

Yeah, I mean, I think it is sustainable, and I would focus really on two areas. And I use the IMF forecast a lot. Like you said in the intro, I’ve been there 28 years, so I guess it’s in my blood. So the IMF forecasts five years ahead. So right now, 2031 is the last forecast, and you could think of 2031 as sort of the steady-state medium-term forecast. And IMF forecasts clearly believe this is sustainable. So for 2031, advanced economies as a group are expected to grow around 1.5%. This group of economies, China, India, plus the ASEAN Five, they’re expected to grow at 4.5%, so three times as fast as advanced economies. So, you know, one piece of evidence is IMF forecasts clearly suggest that it’s sustainable. The second piece of evidence is just economic theory. If we exclude Singapore, these economies in general are much lower income than the US, and economic theory says that lower-income economies, in general, should grow faster as they catch up to advanced economies. Now, that’s the theory. Actually, in reality, it doesn’t happen as much as we think, but Asia is one good example where it does happen. And so here we have both IMF forecasts and economic theory would suggest that it’s gonna be sustainable. 

Elizaveta Gridneva

That’s quite fascinating. Thank you for that. But at the same time, what do you think are the bigger risks that actually could disrupt this shift, both maybe within China, India, and across ASEAN? 

Steven Barnett

Yeah, I think there’s two big risks, and they’re actually related. You know, one is this region is highly integrated and they trade a lot, so they really rely on what happens in the rest of the world. Uh, as a group, they run a large trade surplus, you know, mainly China, but the trade surplus is around, if I recall, around $800 billion. So slower growth in the rest of the world would clearly spill over into this region. So that’s one risk. Related to that risk is that what we’ve seen lately is an increase in, you know, fragmentation, or some people call it geoeconomic tension, uh, decoupling. But, you know, the bottom line is if we step back, we know that fragmentation, countries trading less with each other, is actually quite costly. And if I look back at some work the IMF had done, IMF had estimated in an extreme scenario where there is a lot of trade fragmentation, that the global economy could be 7% smaller. So again, a big fragmentation in the global economy, 7% smaller. That’s just trade. If you add in technology decoupling, some economies could be 7% to 12% smaller. So these economies are big traders, and so they wouldn’t be immune to that. So I think the two related risks are a slowdown in the rest of the world, and, in particular, a slowdown that’s fueled by increasing fragmentation. 

Elizaveta Gridneva

Understood about the risks. And you mentioned IMF forecast. So if we look at the IMF forecast horizon, what happens, you think, to the relative share of global GDP between emerging markets and advanced economies? 

Steven Barnett: Yeah, this is, you know, a great question and I think a little factoid that people often miss. IMF numbers start in 1980. So if you go back to 1980, roughly speaking, advanced economies were two-thirds of world GDP and the rest were one-third. The rest we call emerging market and developing economies. It’s kind of a mouthful, but these two groups together add up to world GDP. So 1980, advanced economies were two-thirds. Let me just call them emerging markets, but it’s really emerging markets and developing economies, were one-third. Go forward to 2031, IMF forecast is a complete flip. Emerging market and developing economies will be roughly two-thirds of world output and advanced economies one-third. If you’re being particular, it’s 64% for emerging markets. So in the past roughly 50 years, the relative size of these two groups has completely reversed. You know, I used to joke, although it’s not really a joke, the IMF flagship publication is a world economic outlook, and it always starts with a description of developments in advanced economies. So maybe it’s time to switch and start with the developments in emerging market economies because they’re actually the larger share of the world. 

Elizaveta Gridneva

Exactly. And actually, um, I read that you documented that by PPP, purchasing power parity metric, China is already the world’s largest economy. So you exactly emphasize that the story looks completely different using PPP versus market exchange rate. Is that correct? 

Steven Barnett

Yes, that’s correct. In fact, uh, often when I give public lectures, it’s one of my first slides. It’s sort of a trick question. Also, a little bit of a joke on us macroeconomists is, you know, I ask people what’s the world’s largest economy? And it turns out the answer depends. If you use PPP, it’s China. If you use market exchange rates, that is, just convert everything into U.S. dollars, it’s the U.S. You know, and the joke is the typical desire for a one-handed economist, ’cause economists can’t give a straight answer to any question. It’s always on the one hand and on the other hand. But, you know, here’s a case where it really does matter. You know, and if you go back and redo the exercise we just did on the relative size of advanced economies versus emerging markets, you actually get a different answer using market exchange rates. So 1980, advanced economies were 75% of the world. IMF forecast by 2031, they’re still over 50% of the world. So you don’t get this reversal, and so it really does matter how you measure. Maybe just make two relatively, uh, technical points, but one, it matters more for some economies than others. China’s actually pretty big by both metrics and relatively similar. It’s a little smaller in U.S. dollar terms. But the U.S., for example, is nearly twice as big using market exchange rates as using PPP. Uh, India is also much bigger using PPP than market exchange rates. So part of this flip in the result that, you know, using market exchange rates, advanced economies stay bigger, is because the U.S. is much bigger. Uh, an economy like India is much smaller. 

And the second, you know, what’s the difference? You know, in real simple terms, PPP tries to account for the idea that in an economy like China or India, the value of how much it costs to buy stuff is cheaper. And the classic example, which is not my favorite, but it’s what we all use, is a haircut. So the idea is that a haircut in China is much cheaper than a haircut in the U.S. And so PPP tries to account for that. If we want to measure how much goods and services are produced, how many haircuts there are, we need to account for the fact that you get more haircuts per dollar in China than you do in the U.S. So for those type of questions, PPP is clearly correct. However, for other questions, you could argue market exchange rates are better. If I’m an exporter and I care about my profits in dollars, then I don’t care if a haircut is cheaper. I really care how big is the economy in dollars. So I think the right metric really depends on the question you’re asking. 

Elizaveta Gridneva

Great. It was a very great way to explain the difference for our listeners, so I appreciate that. Mm, and shifting now to another topic. I know you’re passionate about China domestic consumption. Uh, your current academic research is actually about framing China consumption the right way. So please help us distinguish between two ideas people often confuse: China growing through domestic consumption, uh, versus global demand for Chinese exports. What’s the difference, and which matters more right now? 

Steven Barnett

Yeah, this is a great question and, you know, thanks. As you noted, this is one of my favorite areas to discuss. So first, maybe just to step back, some basic growth accounting. Us macroeconomists like to break up GDP growth into consumption, investment, and net exports. So it has to be the case. It’s an accounting identity that GDP growth equals the sum of the contribution from consumption, from investment, and from net exports. And so the punchline is, if you look back over the last 25 years in China, net exports have contributed much less to growth than people think, with a little caveat about the recent area that I’ll come to. Even when exports were booming right after China joined WTO, so if you go 2003 to 2008, exports accounted, or net exports to be exact, 4% of Chinese growth. I’m not misspeaking, 4%. So 96% of growth in China was coming from consumption and investment. In fact, investment was actually a little bit more. If we look at the pre-pandemic period, so post-global financial crisis, pre-pandemic, net exports accounted for 0% of growth. What’s striking is the recent period. Since the pandemic, so 2020 to 2025, we see the biggest contributions to growth in terms of share that we’ve seen. Over these six years, so 2020 to 2025, net exports contributed 20% of growth. Probably still much less than many people would think, but much more than we’ve seen in the past. Some of that is that overall GDP growth has come down, so net exports are explaining more of it. But it’s also true that the economy has depended more on rising net exports, and this is particularly true for the last two years, where net exports actually accounted for about 30% of GDP growth. 

Elizaveta Gridneva

Right. And, uh, you’ve also shown that China’s household consumption share is actually very low by international standards. What explains that, and what does it tell us about the state of Chinese consumers right now? 

Steven Barnett

Yes. Uh, you know, as you noted and as I noted, consumption is my absolute favorite topic to talk about. And strangely, it’s probably the one topic that everybody in the world agrees on. China wants to boost its consumption. The IMF wants more consumption in China. The US wants more consumption in China. The Europeans want more consumption in China. So basically everyone agrees. I’m not sure that they agree for the same reason, but it is a rare area of universal agreement. And when I tell the China consumption story, I actually tell it a little bit differently than most people. I think it’s really important to start the story with a very simple fact. China’s had the fastest growth in consumption of any major economy by far. So if you look back 25 years, no country has come close to the per capita growth in household consumption of China. So we need to be careful when we look at the poor Chinese consumer. Actually, they’ve grown much faster than anywhere else in the world. That growth in consumption is a pretty good proxy also for growth in living standards. So this matches what those who’ve been to China can see: the very, very rapid gains in living standards that we’ve seen in China. Yet it’s also true that consumption is a low share of GDP. How did it happen? Well, the problem, if you can call it a problem, is that GDP grew even faster than consumption. So here China had super-fast growth in consumption and even faster growth in GDP, so the denominator grew faster than the numerator, so we see very low consumption to GDP in China. 

You know, fixing this is clearly a priority for the government, and the government language, both around the two sessions and the next five-year plan, has really emphasized boosting the share of consumption in GDP. I think the challenge is that it’s hard to do. If it were easy, they would already do it. So again, consumption’s grown very fast. 

It needs to grow faster than GDP. And here, you know, one last comment. The kind of conventional wisdom, which I don’t disagree with but I think is not enough, is that China needs to strengthen the social security system. So give people better healthcare, give them a better pension system, savings will fall and consumption will rise. I don’t mind that argument, but I don’t think it’s gonna get us there, and my logic is simple. China’s made enormous improvements in the social security system. Pensions are much larger, almost universal care, universal healthcare. Yet despite these dramatic improvements, the savings rates remain high. So more improvement in these areas would be welcome, but I don’t think it’s gonna lead to a sharp reduction in savings. And something that I’ve been arguing for, and something my years at the IMF have taught me, is if you need a big change, you need a big policy. And to me, the big policy is a cut in payroll taxes. China levies very high taxes on workers, basically, much of it paid by the employer, some of it paid by the firm. This is to actually finance the pension system. It’s basically European levels. And cutting that payroll tax would boost consumption three ways. First, it would give workers more money. Second, it would lower the cost for a firm for hiring workers, so employment would go up. And third, it would reduce informality. 

It’s so expensive to be in the formal labor sector, the formal sector for labor, that many people find ways to skirt it, to avoid social security payments. So it’s a big measure, and I think it would move the needle and lead to consumption rising faster than GDP. 

Elizaveta Gridneva

Great. Thank you, Steve. That was a very detailed excursion inside of what’s happening in China, so I think it helps us understand things better. And, um, I think, final question for today: looking ahead, what’s your outlook for Chinese domestic consumption, and what would need to change for it to become a bigger driver of growth? 

Steven Barnett

Yeah, I think notwithstanding the latest data print, which showed retail sales—I think retail sales were quite weak, and I can come to that—I would expect consumption to continue to rise as a share of GDP. Not as fast as people want, though. So actually, if we look back, what we have seen is there’s been a steady rise of consumption as a share of GDP, but not fast enough. And like we talked about, to get that ratio up, we really need consumption, for a long period of time, to grow much faster than GDP. 

You know, and as I argued before, doing more of the same will probably get more of the same result, which is a steady rise in this ratio. Again, we don’t want a steady rise. We want a more rapid rise, which again is why I would argue for a big measure like the cut in payroll taxes. Uh, I think it’s important when we look at Chinese consumption to understand that Chinese consumers have been hit with several pretty big shocks, and that consumption’s actually been pretty resilient if we factor that in. 

What are the shocks? There’s the pandemic, which hit the whole world. There’s a very China-specific shock, which is the real estate sector. You know, China’s had a correction in real estate that almost anywhere else in the world would have led to a full-blown crisis. Yet the Chinese economy’s been fairly resilient, but it’s not surprising that it’s weighing on consumers. You know, more than 90% of urban households own their home. So everybody is feeling the impact of falling housing prices in the real estate correction. So kind of against all these headwinds, uh, I think consumption has been resilient, but we don’t need resilient consumption. We need consumption to be more than resilient. 

We need it to be growing as a share of GDP. And maybe just one last comment, because we just got data on retail sales, and I think people were quite disappointed. The retail sales numbers were quite weak. I just always like to remind people that retail sales is not consumption. In fact, retail sales is a subset of consumption, and it also includes purchases by governments and corporations. 

So, like, it has information content, but we shouldn’t overweight its impact on consumption. It’s nice because we get it monthly, and it’s probably the best monthly indicator we have of consumption. But I always caution people that, you know, it’s missing some really big items, so it’s really only a subset of consumption, and it includes spending by non-consumers. 

Elizaveta Gridneva

Great. And I think I also would like to give you the opportunity, uh, for the final takeaway you would like our listeners to have on the topic, given your deep expertise. Please. 

Steven Barnett

Yeah. Well, again, thank you for having me. And I think for me, as you said in the intro, 28 years at the IMF, it’s not surprising that I’m a big believer in multilateralism, a big believer that the world working together is the best way to solve problems. And it really is unfortunate, in the last 10 years or so, after decades in the post-World War II era of a steady increase in global cooperation, which has led, I think, to a steady increase in living standards, we’re seeing this system under a lot of stress, and we’re seeing an unwinding of this. And I firmly believe that without cooperation, if we fall into this beggar-thy-neighbor and each economy doing what they think is best for itself, the whole world is gonna end up worse off. So I really hope we can reignite the spirit of countries again cooperating. I think the cooperative solution for trade and finance is one where everyone is better off. So I guess my main takeaway is a plea for countries to again kind of sit down and work out their differences. We’ll all be better off if they can do that. 

Elizaveta Gridneva

Yeah, I believe in that too. Thank you, Steve, for joining today. It’s been a pleasure having you. Thank you, everyone, for listening, and please subscribe to IBKR Podcast. Thank you.