India and China: Why India and China Matter

Chetan Ahya / Morgan Stanley

Increasing global productivity and growth
Participation in globalization is raising productivity and growth rates for India and China. The two economies together represent 40% of the global labor supply but their share in global output is only 6.7% in nominal dollar terms (21% in PPP terms). The economic trend of globalization — that is, the cashing in of global labor arbitrage — is improving the utilization of their work forces. Indeed, their participation in the world economy as a result of globalization is redefining the macro theory applied during the era of closed economies.

The two countries will continue to boost global productivity as long as the supply and stock of the unemployed and ‘able’ working-age population remain high. We define ‘able’ as the part of the population that is not only skilled and capable of competing in the global market place but that also has an enabling environment provided through the government’s structural reforms, i.e., removal of obstacles and provision of infrastructure/platforms. The world economy does not seem to be close to the point where this labor arbitrage no longer plays out in view of the current low levels of wages, large stock of surplus labor and the expected additions to the labor pools in India and China.

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