Book review of the book called Eclipse. Brief description of how china's economy is affecting Indian economy

1. Vrutti Tanna | Neha Amlani | Yash Aryan | Vishal Mishra
Suman Kumar | Tanya Rastogi | Vaibhav Vyas | Vivek Vora
Niharika Nandini
ECLIPSE – LIVING IN THE SHADOW OF
CHINA’S ECONOMIC DOMINANCE
Submitted To:
Prof. Nasheman Bandookwala

2. CHAPTER-1 : A BRIEF HISTORY OF
ECONOMIC DOMINANCE.

3. • Suez crisis of 1956
• Suez canal construction in 1859 owned by French
• Insolvency of Egypt in 1875
• UK acquired suez canal but later became net debtor
• Egyptian president nationalized suez canal in 1956
• UK ,Israel and France attacked and Egypt responded by sinking all
ships and vessels in suez canal
• Oil tanker traffic was blocked

4. • Oil prices increased and it led to inflation in UK
• UK turned to US for financial assistance
• Us supported with $1.3 billion IMF and $500 million loan from
export-import bank
• 4 main aspects were highlighted
• Economic means to secure noneconomic objectives
• Dominant countries have political , economic and military power
• To secure national objectives of other country
• US not just used stick but carrots to change outcome.

5. CHAPTER-2 : QUANTIFICATION AND
VALIDATION OF ECONOMIC DOMINANCE

6. • Quantifies economic dominance
• Intrinsic value and instrumental value-economic and noneconomic
outcomes.
• Outcomes can be national or systemic
• Various areas of economics are included such as resource , trade ,
finance and currency.
• Aim is to study economic dominance of next 20 years.
• Quantifying economic dominance by constructing an index

7. • 5 principles for quantification should be taken into consideration
• Balance between indiscriminately inclusive and objectionably
selective
• Data should be easily available
• Projecting the variables over 20 year time horizon in order to predict
future
• Reasonable and justifiable basis for weighting the variables and
computing index.
• Validate the whole business through various ways.

8. • 4 Steps
• List all possible determinants of economic dominance.
• Narrow the list and consider only some determinants.
• Issues in measuring index.
• All variables are weighted in order to construct index and validated
in different ways.
• Useful attempt is made to understand economic dominance.

9. CHAPTER-3 : QUANTIFYING CURRENCY
DOMINANCE

10. • Definition: An International Currency is simply one that is used outside
once own country. The greater the use, the more it merits the
description of a reserve currency.
• Benefits and Costs to the country issuing the Reserve Currency:
Benefits:
1. Convenience for the country’s Residents
2. Seigniorage or Exorbitant privilege in good times
3. Seigniorage or Exorbitant privilege in bad times
4. Political Power and Prestige

11. • Costs:
1.Exorbitant curse, not Exorbitant Privilege
2.Vulnerability from Exorbitant Privilege
3.Burden of Responsibility
4.Costly Pre-Requisites
• Short History:
• The dollar made its first experience as a reserve currency in the interwar
years. In this period, the pound and the dollar accounted for a roughly equal
share of reserve holdings.
• According to estimates in Robert Triffin, The share of Sterling in World
foreign exchange reserves was higher than that of the dollar until 1954.
Thereafter the dollar's share rose steadily, reaching 65 percent in 1973.

12. • The German mark and Japanese yen started featuring more prominently official
reserve holdings from the mid 1970s onward, with a corresponding decline in dollar.
• In 1970, a new reserve currency was issued by the imf called the special drawing right.
This action was in response to the belief, spawned by the analysis of triffin, that there
could be an inherent shortage on international liquidity. The solution therefore was to
create a synthetic reserve asset, the SDR, to supplement the supply of the reserve
currency and gold.
• What determines reserve currency status?
1. To be an attractive store value on the issuing country should have low and stable
inflation as well as a stable and relatively strong exchange rates.
2. The more transacted a currency is, the more there will be an incentive to use this
currency as a medium of exchange and as a unit of account, and hence the more it
will be transacted.

13. CHAPTER-4 : FORCES DRIVING
DOMINANCE: CONVERGENCE AND
GRAVITY

14. CONVERGENCE- the idea of convergence in economics is the hypothesis that
poorer economies per capita incomes will tend to grow at faster rates than
richer economies. As a result all economies should eventually converge in
terms of per capita income.
 Gravity- gravity is just like gravity model of international trade in international
economics, similar to other gravity model in social science, predicts bilateral
trade flows based on economic sizes (using GDP measurements) and distance
between two units.
Simply we can say that it is only shifting of global economy’s hub.

15. Shifting in economic dominance seems to possible because in year 2007
financial crisis started in continents like Europe and united states, and that is
called recession period in economy.
 At the time of recession, all the European and American century was struggling
with losing job, unemployment, production low either the cost of production
was increasing. That give the birth to the sifting of aggregate demand and that
period is called supreme crisis.
Convergence and gravity help quantify future GDP and trade comparing the
period when the united states become largest economy (around 1870).
WHY CONVERGENCE AND GRAVITY?

16. CHAPTER DEALS WITH
 This chapter deals with projection like future economy and currency dominance
, which is driven by “economic convergence” whereby poor countries catch up
with rich ones.
 By “gravity” whereby trade between countries determined by their gdp’s .
 convergence and gravity help quantify future gdp and trade.
 This chapter shows that convergence, which was selective until recently, has
become much broader in scope and faster in pace.

17. THE FIRST PHASE (13000BCE TO 1000CE) - this period is called Malthusian
stagnation. the life was in the words of Thomas Hobbies ,”poor, nasty, brutish,
and short.
 THE SECOND PHASE (LATE 1700s) - the decisive break from subsistence started
after the middle ages, culminating in the industrial revolution of the late
1700s.this industrial revolution created also the “great divergence” whereby the
west – the United Kingdom and its western offshoots- embarked on a trajectory
of consistently upward improvement in living standards while the rest lagged
behind. The great divergence marked the second phase of human economic
history and continued, with some exceptions, until world war-2.
DIFFERENT PHASES (ERA) OF ECONOMIC HISTORY
(CONVERGENCE OF THE PREVIOUSLY POOR)

18. THE THIRD PHASE (AFTER WORLD WAR-2) - the third phase starting after the end of
world war 2. A group of countries like japan and Germany started growing faster in per
capita terms than richer countries. In between 1950s to 1970s several poor countries like
Taiwan, Korea, Singapore, Hong Kong, Malaysia, Indonesia etc, this converging
performer was then follow by the two largest countries – china and India – with the
potential to become systemically important. In some way, china and India were
latecomers to the catching up process.
THE FORTH PHASE (after rescission) - we can say that world has now entered in a fourth
phase of economic history. In the decade and a half preceding the recent global
economic crisis, a much greater number of countries in Africa, Europe, Latin America,
and Asia have started growing much faster than in the past and much faster than the
industrial countries.
CONTINUE

19. According to data sources which I mentioned above during 1870-1960, two
nonoil developing countries (of a total of 38) grew faster, than the united
states (the benchmark for convergence analysis).
 In the next phase (1960-2000), 21 out of 72 countries converged towards us
income levels, with narrowing the gap rate of 1.5 percent per year.
 Out of this analysis the best collective performance was the year of 1970s
when 38 out of 87 countries exceeded us growth rate by an average of about
2.5 percent.
ANALYSIS OF CONVERGENCE AND GROWTH RATES OVER TIMES
(1870 – 2008) WITH SOME DATA BASED ON SOURCES (MADDISON,
PENN WORLD TABLE, AND WORLD DEVELOPMENT INDICATORS)

20. According to data sources which I mentioned above during 1870-1960, two
nonoil developing countries (of a total of 38) grew faster, than the united states
(the benchmark for convergence analysis).
 In the next phase (1960-2000), 21 out of 72 countries converged towards us
income levels, with narrowing the gap rate of 1.5 percent per year.
 Out of this analysis the best collective performance was the year of 1970s
when 38 out of 87 countries exceeded us growth rate by an average of about 2.5
percent.
MEASURING GDP LEVEL AND GROWTH RATES:
PURCHASING POWER PARITY ESTIMATES

21. This of course, will not just be true of group of countries, but also
individual ones.
 In particular, the economic dominance and hegemony of the united
states will be under challenge from the rising china.
the recent global financial crisis may end up accelerating some of
tends but the crisis will not be the underlying cause for sifts.
 A key massage is that the dominant west will have to start
readjusting to the new reality pf reality of relative but not necessarily
absolute decline
CONCLUSION

22. CH: 5 PROJECTING ECONOMIC AND
CURRENCY DOMINANCE

23. • INTRODUCTION
• FORECASTING ECONOMY
• CURRENCY LEADERSHIP
• RELATIVE ECONOMIC DOMINANCE OF CHINA

27. • Using IMF weights the economic size will shifted dramatically in
favor of china in 2030 compared with 14.5 % for the U.S as the
china’s per capita GDP will be about half that of the U.S by 2030.
• Using reserve currency weights up to 2030 china will account 15% of
world trade twice that of U.S

28. • There is question of prosperity in determining dominance which is
measured by a country’s per capita GDP as it may or may not play a
role in determining dominance .
• This projections have not considered Europe as a potential candidate
for dominance where its recent crisis has raised questions , so arvind
includes Europe union as a single political unit

29. • The renminbi could be in a position to rival the dollar within the next
ten years , trade is a significant determinant of reserve currency
status combined with china’s growing trade dominance portend
strongly for the yuan as suggested by the trade projections in
chapter 4.
• Chinese economic dominance is more imminent and more broad-
based encompassing , output , trade , and currency-than currently
recognized

30. CHAPTER-6 : A HISTORICAL PERSPECTIVE
ON CHINA’S DISTINCTIVE DOMINANCE

31. • Why dominance cannot be wielded by a poor country.
A country must be socially stable and higher standard of living.
A poor country might not be able to raise the resources- at least
on a sustained basis- for the power of projection internationally.
A poor country may not have the "soft power" attributes (such as
democracy, open society) for dominance.
To become a super power, a country must be economically and
technological rich.

32. CHAPTER-7 : GUARDING AGAINST RASH
PROPHESYING

33. • China’s Growth- It focuses on three factors
• Politics
• Price
• people
• Looking Back
• Realism of Trade projections
• Gravity Model
• Conclusion

34. CHAPTER-8 : ECONOMIC COOPERATION
WITH A RISING CHINA

35. • Prospectus for Cooperation Leading up to Chinese Hegemony
• Demise of “Chimerica” (Self Interest rather than external influence)
• Likely demise of Mercantilism
• Reasonably strong Chinese stake in an open trading System
• Exchange & Reciprocity as determinants of the Efficacy of the World
Trade Organization

36. SOME TERMINOLOGIES
• Is the economic possession of control of one state
over others
Hegemony
• Relationship between china and the united statesChimerica
• Freedom of trade between countries with decreased
regulations
Open Trading System
• the practice of exchanging things with others for
mutual benefit, especially privileges granted by one
country to another.
Reciprocity
• Ability to produce a desired or intended resultEfficacy of WTO

37. CHAPTER-9 : CHINA AS THE NEW RAISON
D’ÊTRE FOR REVIVING MULTILATERALISM

38. • Multilateralism:
• The practice of promoting trade among several countries through agreements
concerning quantity and price of commodities, as the Common Market, and,
sometimes, restrictive tariffs on goods from outsiders.
• China is communist ruled country.
• Their government has large restrictions and control over each industry and
trade.
• Chinese govt. bought some economic reforms in past but they should bring
more reforms and try to decontrol some trade and industries.

39. Further opening of Chinese market and preventing deliberalisation of it, is main
concern of countries that has trade agreement with china.
As a WTO member, china is more open in trade rules but more close in policy
terms especially outside traditional goods, thus giving control of large
economic activity to government only.
Due to this, in trade agreement, other countries have very limited bargaining
power over china.
Big countries like USA, UK can control bargaining in future with threat to close
their market for china, if china does not bring some economic reforms for
opening of market.

40. • If emerging countries like mexico, brazil, India expresses their
concern with china, supporting USA, market reforms can be more
promising.
• China’s trading partner should force it to agree on multilateralism.
• if more country will enter in bilateral agreement with china, they will
exposed to china’s increasing dominance over trade.
• But this multilateral agreement should happen between other
countries too, otherwise china will be left out if other countries enter
in free trade zone agreement with each other.

41.  Other way is promiscuous bilateralism.
 In this both country negotiate until common goal is achieved and
market is equally open on both side.
 But this will stop liberalization in china.
 Another option is hostile bilateralism by big trading partners like
USA, and Japan.
 They will enter into bilateralism but exclude china, thus pushing
more reforms.
 But china can then enter into agreement with emerging countries
and gain profit thus reducing effect.
 One more option to reduce china’s economic dominance is Asian
countries forming union to trade with china, thus reducing china’s
bargaining power. Countries like India, Japan, Indonesia, Singapore,
Malaysia.

42. • China can also gain dominance by undervaluing currency and
proved de-facto.
• It will thus impose export subsidy and import tariff, so china’s market
will be more closed than even before.
• To stop china’s economic dominance, collective action and strategic
forbearance is required.
• Usa and India together can also create china-focused multilateralism,
to motivate other countries to enter in multilateralism with china.
• Due to its institution structure, usa can dominate china by first
inviting for trade and then negotiating reforms not but govt. But by
congress.

43. India is essential spokesperson and intellectual leader to many
developing countries also known as G-77.
But India’s dependency on china in manufacturing sector, makes India
weak on bargaining in trade agreements.
Because of border sharing with china, India choose not to enter in
multilateralism with USA and chin, but it makes India and also other
country’s command weak over china trade market.
Only way possible and best outcome is all country multilateral system
with china, thus every country is forcing china for reforms or closing all
market for china.

44. • If Chinese currency renminbi becomes international currency then
chance is that china have to maintain good relation in trade to
maintain prestige.
• But history suggests that world cannot rely on china, and china can
even start world war situation if economic dominance is not stopped.
• Only best way to stop china’s dominance is all country(usa, India,
Japan, UK, and other emerging countries) creating and strictly
following multilateralism system with china.
• They need to remove affection towards short terms gain in
bilateralism and forcing china in multilateralism.

45. BOOK REVIEW

46. • Arvind Subramanian is currently the
Chief Economic Advisor of Indian
Government
• He has also served as senior fellow at
the Center for Global Development
• His role is primarily to produce the
Annual Economic Survey
• He is a widely cited expert on the
economies of India, China and the
changing balance of Global Economic
Power
• He also plays an important role in
monitoring the Fiscal policy and Tax
Reforms
ARVIND SUBRAMANIAN

47. • According to the Author, China is expected to become the
economically dominant country by 2030
• With the inclusion of Renminbi in IMF, it has laid a Roadmap for
China in becoming a Super Power
• The transition of Economic Power is depicted
• The factors that makes a particular country Economically Dominant
• China’s Trade, Currency, Military strength, Resources availability,
Wealth, External Financial Strength
• Argues in relation to this
ABOUT THE BOOK