Does Fast Growth in India and China Help or Harm US Workers?

Abstract

A major issue today is whether globalization of the world’s labour, capital and product markets, together with rapid economic growth in India and China, will have an adverse effect on workers in the US and other advanced countries. Simulations of different scenarios using the Cambridge‐Alphametrics Model of the World Economy indicate that, at a bloc‐disaggregated level, there are severe supply‐side constraints relating particularly to natural resources (energy and raw materials) that thwart the expansionary demand effects of fast growth in India and China. This analysis is based on long‐term trends in the world economy prior to the current global financial crisis. However, for the sake of completeness, it also comments on the likely implications of this crisis for the USA and other advanced country workers.

Key words:

• Development
• Industrialization
• Growth convergence
• India/China
• US workers

Acknowledgments

We want to thank Francis Cripps for the production of the version of the model used for simulations, as well as for his useful comments. Comments by an anonymous referee helped to strengthen the argument in significant ways. The usual disclaimer applies.

Notes

1 Integration is referred to as the process that is taking place under ‘current globalization’, which consists of free trade, free capital movements and domestic labour market flexibility (instead of free international movement of labour).

2 Many scholars would argue that these two countries should have had their industrial revolutions more than 100 years ago but they were thwarted in this endeavour by colonialism and imperialism.

3 For a recent review of this literature, see Singh (2007).

4 As noted earlier, this issue is discussed at some length in Singh (2007).

5 The model of the Cambridge Economic Policy Group. See also Cripps (1978, 1979) and Cripps et al. (1979, 2007). At the time of drafting this paper (early 2007), CAM version 2 was used. Subsequently version 3 was released in 2008, which adds more sophistication on the policy side. An experiment with such a version did not show significant differences with findings of version 2 in as far as the hypotheses of this paper are concerned.

6 A more elaborated exposition that lists the main model equations is available from the authors.

7 The straight‐jacket of accounting consistency on the basis of which the model is constructed is preserved through model solutions, and thus all macro‐economic variables, including exchange rates, are adjusted to comply with global identities by distributing the ‘closures’ in linear fashion (as in ‘linear expenditure system functions’).

8 For an exhaustive elaboration of this point in a fully specified macro‐economic model, see Godley and Lavoie (2007). Godley and Cripps (1983) introduce this notion in an aggregate macro‐economic setting.

9 The adjustment takes place over time with a regularity that is captured econometrically and is eventually represented by the introduction of lags in the expenditure function. The empirical determination of the lags incorporate by necessity the influence that financing has in allowing imbalances to persist to a certain degree.

10 An anonymous referee has correctly noted that the patterns of price escalations of energy are not the same as those of food and raw materials in the CAM simulations. This may well reflect in part the fact that both kinds of products face different patterns of evolution of demand (e.g. ‘Engel’ curves), and in part the fact that embedded technical progress functions in the production of energy may face constraints that are either more difficult or take more time to resolve.

11 Fast economic growth in India and China is a social necessity to allow shifting hundred of millions of people from farms to industry. In India there is the additional compulsion of providing jobs for a growing labour force. The rise of the Indian growth rate to nearly 9% per annum during the past three years is internally sustainable as it is based on a trend increase in the country’s saving and investment rates from about 25% to well above 35%.

12 Our simulations were run without hindsight knowledge of the current global recession. It is by now know that the crisis emerged towards the second half of 2007 as a consequence of sustained falls in house prices, which shook the subprime mortgage market, and turned severe in 2008 when the largest financial institutions in the USA and Europe started to be hit by failures in the markets for securities and other derivatives. While it is not the intention of this paper to explore the various theories and beliefs about the crisis, it is worth pointing out that both the process of financialization and deregulation of the global economy and the ensuing crisis that exploded in 2008 were not independent of the accumulation of unsustainable global imbalances captured earlier in the dynamics of the model and its core ‘stock‐flow’ adjustment process.

13 According to the Intergovernmental Panel on Climate Change (2007) Fourth Assessment Synthesis Report, Section 4, significant improvements in energy production from non‐fossil fuel sources can be achieved in the medium term, to the extent of actually reducing global carbon dioxide emissions even in a steadily growing economy.

14 The authors wish to thank Jane d’Arista who drew their attention to this article.

15 The United Nations Conference on the World Financial and Economic Crisis and its Impact on Development (New York, 24–26 June 2009) coded ‘G192’ to stress its more global and inclusive approach to international policy than the G20 or the G8.