Slower growth in China and India: consequences for the global economy The pace of growth in China and India over the next 25 years is likely to significantly outpace the growth in the rest of the developing world. In this simulation, Chinas 2005-2030 real GDP growth declines from 5.8 to 5.2 percent, while that of India is reduced from 4.9 to 4.4%. World GDP growth over the same period declines by 0.06 % per year; this effect is mostly driven by a reduced contribution of the giants to global output (direct effects).

The indirect effectsspillovers to other countries through changing trade patterns and world priceshave only minor impacts on real GDP. The main reason for this result is that the growth process is determined by accumulation of labor and capital, and TFP improvements. Slower growth in China and India does not have an impact on labor force growth or capital accumulation in other countries, and affects TFP only marginally through reduced openness.

However, effects on consumption are more pronounced.  Global Income Inequality If the world were a single country, it would be one of the worst distributed. The fact that global inequality is higher than the inequality level within most countries is explained by disparities in average incomes between countries.

This is also clear from the results of two different population decomposition exercises: (1) defining the subgroups as countries, and (2) defining two subgroups, China and India versus the rest of the world. In other words, eliminating all within-country income differences would bring global income inequality down by 25 percent. In a second exercise the worlds population is partitioned in two subgroups, one containing the populations of China and India and the other one with citizens from the rest of the world.

This decomposition shows that in 2000 comparing average incomes of the China and India group with average income in the rest of the world (RoW) would be enough to capture 18 %of total income inequality. The importance of China and India gets much larger when considering changes between the 2000 and 2030 global distributions. By 2030, the Gini for the global income distribution is 5 points lower than its level in 2000.

According to the decomposition results, the reduction in inequality between 2000 and 2030 is entirely accounted for by a reduction in disparities in average incomes across countries. Since reductions in average incomes differentials are weighted by population, a rapid growth of poor countries like China and India can have a great impact on global inequality.

The Emergence of the Global Middle Class

According to our baseline, in 2030, 16.1 percent of the world population will belong to what can be called a global middle class, up from 7.6 percent in 2000. This large middle class will create rapidly growing markets for international products and servicesand become a new force in domestic politics.

The total increase in the global middle class is explained by:-

(1) Population growth rates of cohorts within this class that are above the world average and

(2) By higher economic growth rates in developing countries which pull their citizens out of poverty and into the global middle class. The population growth rates of households within the global middle class (as classified in 2000) was relatively low with an average rate of 18 percent over the entire period, as opposed to the world average of 32%. Therefore, the great majority of the increase in the global middle class is explained by high economic growth rates taking place in developing countries.