In a letter earlier this year discussing the situation in China, we said: “All around the world, every investment planning or strategy session probably includes the word ‘China’ very early in the discussion.”  Whether considering the price of oil, the value of the US dollar, commodity trends, or the outlook for inflation or deflation, the looming shadow of China tends to shade all such deliberations.

Clearly, China is the biggest factor on the global economic stage these days, and with India about to come into the scene after a long wait in the wings, the entire global economic and investment script needs to be rapidly re-written. Indeed, an illustrative title for this evolving drama might aptly be: “The Bonfire of the Oligopolies” (apologies to Tom Wolfe).

A common definition of Oligopoly is: “A market dominated by a small number of the largest participants who are able to collectively exert control over supply and market prices.” As time passes, that increasingly defines the strong and growing influence of China, and to a lesser extent India, over the world economy, which growth trajectories show no signs of abating.

The economic engines of China and India are powered by lots and lots of cheap labor. These still-emerging sources of power were of little use in an earlier world of communication, transportation, and technology barriers held firm by concentrations of immobile capital, but in today’s much smaller world of freewheeling capitalism, the lowest cost producer is king, and all roads toward lower costs are now heading east. 

If cheap labor has become the key to economic ascendancy, it follows that those with the most abundant sources of such labor have the most likely prospects for economic dominance. Thus, China and India seem destined to become what might be described as ‘population oligopolies.’

On the world scene, if a large industry were dominated by two or three outsized competitors the industry would tend to operate as an oligopoly, i.e., the dominant competitors would control prices and supply in the industry. Indeed, if in a global industry just two competitors had control of 40% of the market, that industry would surely be labeled an oligopoly. In terms of world population, we have just defined China and India.

Presented below is a simple descending table of world population, by country, as of the end of 2003. While the global totals have grown since then, the relative relationships are still about the same. We think that a lot can be gleaned from these statistics.

We were startled to realize that the United States is the third largest country in the world in terms of population, and yet the U.S. is only 12.4% of the combined populations of China and India.

Yes, China and India are 8 times larger than the U.S., and yet we’re above all others on the list. Obviously, this is a very top-heavy list, which means that if these two countries produce just one-fourth (25%) as efficiently as the U.S. on a per-capita basis, their combined GDPs would still be twice as large as that of the U.S. The scary thing is that it is really not too hard to imagine, and perhaps much sooner than we yet comprehend, their eventually becoming perhaps half as efficient as we are now on a per-capita basis. Should this become the case, the portents are enormous, and will forever change the socio-economic landscape of the world.

What do the following numbers tell us about who is likely to long remain among the lower cost producers and, ultimately more important, who is likely in the long run to become the worlds’ largest consumers, lording it over outside suppliers much like Wal-Mart dictates terms to small manufacturers?

It is jolting to realize that China and India have more population than the combined totals of the next 18 largest countries in the world, taken in declining order of size, and these 18 countries produce the lions’ share of world GDP. Just a few years ago, these two largest countries were not even allowed to sit at the table in the world economic boardroom; now they are moving towards occupying the head of the table.

It is surely not a stretch to project that China and India will one day raise their per-capita productivity up to just the average level of the next 18 most populace nations because the productivity average of the top 20 is drawn down by the list containing such poor countries as Pakistan, Bangladesh, Nigeria and Ethiopia. And it thus does not take much imagination to conclude what kind of world economic hegemony China and India will wield should this become the case.

Increasingly, the question becomes not if this will happen, but when.

© 2005 John Dickerson
Editorial Archive