Evolution and Shift of World Economic Powers

Historically, two notable events have influenced the world’s balance of wealth and power. The first is the industrial revolution at the beginning of the 19th century, and the second is the processes of globalization and free trade that followed the World War II in the second half of the 20th century. Before the industrial revolution, a nation’s wealth and economic and military power were proportional to its population. One of the main economic activities then was agriculture and crafts. The scale of agriculture enabled food sufficiency and the division and specialization of labor. The capacity to grow food was, therefore, the basis for the prosperity of nations since the greater the food surplus, the greater the proportion of the population that could work in jobs other than agriculture. This allowed the development of various crafts, metalworking, woodworking, and cloth industries. From the beginning of current era until the industrial revolution, China, and India depended mainly on rice cultivation. Rice was the most productive form of agriculture, supported by efficient irrigation systems. Rice provided enough food for the populations of China and India. From the beginning of common era, the populations of China and India greatly exceed those of all the other countries. Their large populations and the development of agriculture and handicrafts have resulted in the highest gross domestic product in the world. By the early 19th century, the economies of India and China together accounted for more than half of the world’s GDP. In the 21st century, we consider the USA to be the most economically powerful country in the world, but just two hundred years ago, the world’s balance of power was quite different. Then, China and India dominated the world in terms of economics and wealth. At that time, neither the transport nor the communication facilities would have allowed countries to exchange information quickly and measure their economic power. Still, from today’s perspective, both India and China can be seen as the world’s economic leaders, which they have been for 90 percent of the whole at the beginning of 1st century.
Scientific discoveries in Western Europe led to the industrial revolution, dramatically changing industrial capacity. Throughout the era before the industrial revolution, European countries had a very small share of the world’s gross domestic product. Today’s G7 countries – the US, Germany, the UK, France, Italy, Japan, and Canada – had very small economies compared to China and India just two hundred years ago (Edison, 2007). The industrial revolution changed the balance of economic power before the turn of the 20th century, with the US, UK, Germany, France, Italy, and Japan accounting for almost half of the world’s gross domestic product. All those six are considered as part of G7 today. China and India GDP took less than 20 percent in the 1970s. China and India together accounted for less than 9 percent of the world GDP in 2000 (Exhibit 2-4), even though their populations were rapidly growing and accounted for almost 40 percent of the world’s population at the time. The per capita gross domestic product of these formerly leading Asian economies significantly decreased, leading to their status as poor countries. The leaders of these countries had to look for ways to keep up with the Western European countries, Japan, Canada, Australia, and the USA, which had overtaken them. The political decisions made at the Chinese Communist Party Congress in 1970 on regaining China’s economic power have proven to be a success even after 50 years. These decisions are associated with China’s opening to foreign investment and its active policy of attracting Western companies to invest in China. China has been able to offer a large pool of cheaply paid labor, relatively low legal and environmental restrictions on business, free of tax land for industrial development, free ports for the transport of industrial products. Although China is ruled by the Communist Party which is shaped by ideology of Karl Marx’s doctrine, at the same time, China has developed a hybrid model combining the principles of communism and capitalism (Tong, 2016). Here is important to mention, that nowadays, western economies are also kind of mixed economies as the China`s hybrid model, for example the United States or European Union is not only a market economy, but it has large scale state intervention in forms of government subsidies, regulation of some markets, especially those which are important for social security, health, climate change, gender equality as well as public services and infrastructures. The necessity of state intervention to correct free market failures, imperfections and negative impacts are strongly argued by left wing liberal political parties. More about political systems are described in Chapter 8 of the book.
Having mix of communism and capitalism, China has allowed the development of private businesses and initiatives while maintaining firm state control and supervision. Parallel to the Chinese Communist Party’s decision to open up China’s economy to investment and partnership with the Western world, the 1970s and 1980s saw intense political developments concerning the liberalization of international trade. Trade liberalization is described further in Chapter 3 of Part B of the book. China was seen as a very convenient place for Western countries to invest, as manufacturing and assembling in China were much cheaper than in Western Europe and the US. Over several decades, US and Western European organizations opened factories in China in large numbers (Dicken, 2007). To accelerate this process, China artificially depreciated the yuan, which made labor even cheaper. The low requirements for air pollution, soil pollution, water pollution, and working conditions have been very attractive to investors, as it means lower-cost production and a greater competitive advantage for their products at very large scale.
It is important to note that Western European and US organizations were not only opening new plants but often closing them in their home countries. Over the decades, the US and Western Europe began to deindustrialize. Paradoxically, that factors that elevated the US and Western Europe to the status of world economic powers two hundred years ago, are now being transferred to China. The scale of the transfer was so great that in the 21st century, China has come to be world’s larger manufacturer. Another important aspect is that, although these factories of US and Western European organizations were physically opened in China, they were still owned by their parent companies. So, factories built in China started using Western technology and know-how. Chinese labor went through three stages of acquiring technology from learning by learning, to learning by using and finally learning by doing. Intellectual property protection, patents, and confidentiality agreements were supposed to guarantee that local Chinese entrepreneurs or state-owned organizations would not copy the technology and steal the know-how for their use. IP business models is described in Chapter 4 of Part B of the book. Intellectual property has been highly protected and respected legally in Western Europe and the US since the beginning of the industrial revolution. Patents and licensing came into being as soon as it was realized that a scientific discovery or technological innovation is a tremendous asset that could fundamentally change an industry’s competitiveness. However, attitudes and values in the world vary greatly between countries and cultures – more in Part C, Chapter 9. In a relatively short period, Chinese entrepreneurs and state-owned enterprises have learnt and become adept at producing the same or very similar products and using the same or similar innovations. China has already moved into the 21st century with its own branded electronics industry, developing advanced military weapons, and building the world’s largest airports and seaports. China has managed to absorb, learn, and harness the benefits of the industry over 50 years. For instance, China built almost 40,000 kilometers of high-speed rails in just over a decade.

Ex. 2‑4 World GDP change

Keywords: China, India, GDP

From being an agrarian country, China has become an industrialized country in a very short span of time and has once again returned to the top of the world’s GDP, where it shares the first two positions with the USA. Of course, it is important to note that China is leading in world GDP, which is linked to its total GDP, as GDP per capita still lag behind may European countries. China’s population has grown from 557 million in 1970 to 1.4 billion in 2020 in 50 years. Although China rivals the US for the lead in terms of gross domestic product, the US population is more than 4 times smaller (330 million in 2020).
It must be acknowledged that it is not right to say that China has made inroads into economic leadership in the last 50 years but rather China has regained the leadership it had held until the first industrial revolution. This paraphrase will help the reader to understand the motivation and the worldview that underpins the People’s Republic of China.

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