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Sacrificer           Dr Arvind Virmani 
Sacrifice code       wfor0348
Sacrifice date       25 march 2009

Dear Friends:

An illuminating -- and path-breaking -- research paper titled,


by Dr Arvind Virmani, until recently, Director & Chief Executive of ICRIER (Indian Council for Research in International Economic Relations), New Delhi, was released in November 2005.

The paper shows how the basic building blocks of growth theory, the aggregate production function, factor productivity and technical change can be used to define a simple index of GLOBAL POWER POTENTIAL (VIP2). It also comes to grip with the millitary aspects of power by defining another index, the INDEX OF ACTUAL POWER (VIP), that combines the index of power potential with a measure of strategic assets (technology, equipment and skills related to defense).

The paper provides a relatively objective measure to project the emerging future of nations -- when a country can be classified as a (potential) 'global power' or a 'regional power' or otherwise.

Some of the conclusions emerging from this study have important implications for US-India relations which, hopefully, will be noted by the Congress of the United States as well as by policymakers in India. Also, they have implications for the future relationship between India and the other democracies of the world.

Following is a summary of what emerges from the study and its policy implications:

**National power has two elements -- (a) the 'power potential' of a country, which depends on economic strength and general technological capability, and (b)military capability, which includes defense and strategic equipment and specific technologies needed for attaining military superiority. Together these define the actual power of a country, international ambition and determination, the 'will to power' play a role in transforming the 'power potential' into 'actual power.'

**Economic power is the foundation of national power. Economic strength is the only sustained and sustainable basis for national power and relative economic power is the basis for national power. Military power disproportionate to economic power can be used to enhance national power for a certain period of time; but it's not sustainable over long periods. Example -- the break up of the USSR where military and strategic competition could not be sustained by a declining economy.

**Need to distinguish between two categories of technology -- commercial and strategic. Commercial technology is part and parcel of normal trade, financial flows and movement of managers and skilled personnel between open economies. Strategic technologies are technologies of power. They include military related technologies such as nuclear and aerospace and technology for producing advanced weapon systems and defense equipment. By definition strategic technologies are critical to national power and are not traded on commercial considerations.

**The economic capacity of a country at any point in time is measured by its GDP (Gross Domestic Product). The only way to compare the size of different economies is by valuing all goods and services produced in each, by using a common set of relative prices. Such a measure of a country's economy is referred to as Gross Domestic Product at Purchasing Power Parity.

**Per capita gross domestic product at purchasing power parity or GDP per person can be used as a summary measure of the 'general technological capability' of an economy.

**A nation's power potential (NPP),VIP2, can be defined as the multiple of the size of its economy measured by GDP at purchasing power parity (PPP) and its technological capability measured by its per capita GDP. The paper views the power potential of a country relative to the USA. Thus, the NPP is measured by its GDP at PPP relative to that of the USA. A country with a larger GDP is potentially more powerful than one with lower GDP. Implicitly population and per capita GDP have equal weight. If two countries have the same GDP but one is richer than the other (has higher per capita GDP), the richer country will be potentially more powerful. Since per capita GDP is an indicator of general technological capability, this multiplies the power potential of a given GDP. Overall it also means technology (per capita GDP) has a greater weight in determining power potential than population.

**Actual power, VIP, depends on the amount and quality of strategic assets, including defense equipment, technology and skills, acquired by the country. The Virmani index of actual power (VIP) is defined as a function of power potential VIP2 and the strategic assets of the country relative to the strategic assets of the benchmark USA.

**Maximization of economic growth will maximize 'power potential'. Since Deng's market revolution, China's Leninist ruling party has absorbed this lesson fully and has been acting on it. India's democratic ruling elite has far too long ignored this lesson. Further, acceleration of economic growth in India will not only increase its power but will also (unlike in China) eliminate poverty faster. (This issue has been covered by Dr Virmani in a separate paper).

**Suggested benchmark values of the index for a country to be considered a global power are (20%) or a regional power (5%).


1. United States (100%)
2. Japan (27%)
3. China (25%)
4. Germany (17%)
5. France (12%)
6. United Kingdom (12%)
7. Italy (11%)
8. India (8.5%)
9. Canada (7.8%)
10. Russia (6.5%)
11. Spain (6.4%)
12. Brazil (5.8%)
13. Korea (5.5%)
14. Australia (4.7%)

**Thus, going by the benchmark values, there are currently two potential global powers, China and Japan, in addition to the undisputed and unique USA. Germany, which was a potential global power till a decade ago, is no longer one.

**The world can currently be best described as "uni-polar with a multi-polar fringe" constituted by the middle powers -- Japan, China, Germany. France, UK, India and Russia (by analogy to the market structure, "monopoly with a competitive fringe").

**China is now the third strongest power in the world and will displace Japan in the second place in the next few years. Germany, France, UK and Italy will remain more powerful than India for some time even though India's economy is the fourth largest in the world in PPP terms. Russia's actual power is greater than its power potential because of the historical legacy of the Soviet empire.

**About national power: (a) an aspirant for 'great power' status must have a power potential of at least 35% of the predominant power, (b) a nation state must have a power potential of at least 40 % to be a credible 'great power' and maintain that status, (c) a rising power can be more assertive and credible than is perhaps warranted by the level of its power potential, (d) acquistion of strategic assets is critical for a 'great power' with less than 50 % 'power potential' to challenge the dominant pole and to convert the world into a bipolar one, (e) the minimum cut-off level of 'power potential' for bipolarity may be higher in an open globally integrated economy, but may also be more sustainable.

**Investment in strategic technology must be commensurate with the 'power potential' of the economy so as to convert the 'potential into actual power. Too little investment will result in the potential remaining unrealized and aggressive powers will be tempted to exploit this weakness. Excessive investment can raise actual power in the short run but can undermine long term power potential by diverting funds from other essential public goods and services.

**India and China are still relatively poor countries and their high rank in the global power club is due to their large population relative to USA and other countries.The other side of this coin is that they have the greatest potential for increasing power, by raising their per capita income. For instance, if Russia's and Brazil's per capita income was raised to the level of USA, their 'power potential' would still be only 50% and 60 % that of the USA respectively. In contrast, China and India's 'power potential' would equal that of USA if their per capita income was 50 % of USA's.

**Among the members of the global power club, India and China have the greatest power gap -- that is the gap between their share of world GDP at PPP and their share of world population. Therefore, these two countries have the greatest opportunity for closing it.

** UN population projections till 2050 show Russia's and Japan's population declining by 25%, while India's will increase to equal that of China. Thus, the major increase in 'power potential' will come only through increases in per capita income relative to USA's. The current unipolar world can become bilpolar or tripolar over the next 25 to 50 years if either or both of these countries continue to grow at a much faster rate than USA. The demographic situation of other nation states make it higly unlikely that any of them can compete with USA in the next 50 years. The only other possibility is for the European Monetary Union (EMU) or the European Union (EU) to coalesce into a 'virtual state', which looks unlikely at this point.

**The projected evolution of the 'power potential' of some of the larger members of the global VIP2 club, suggests that India will become more powerful than Italy in five years and France and UK in seven years. In about 10 years (2016) it is projected to become more powerful than Germany. By 2022 India's power potential will exceed 20% making it a (potential) global power along with China and Japan, in addition to USA. No other country has the potential to join the ranks of global powers over the next 25 years. Within 20 years India's 'power potential' will exceed that of Japan. More dramatically, China will become the second strongest global power and continue to catch up with USA, reaching about 75% of USA's 'power potential' by 2025.

**China has since the mid-1980s followed a development model that fully uses the potential of globalization and global economic integration. The FDI-Export model adopted by it goes further and makes it heavily dependent for fast growth on USA, Japan and EU, both directly and indirectly through HK, Taiwan and ASEAN. It will be in a position to challenge US power in Asia when its 'power potential' reaches 60%, i.e. by around 2020. Even then the challenge is unlikely to be of a direct military nature, such as an invasion of Taiwan. However, the use of pressure to achieve the same objective is likely to rise progressively.

**With China's 'power potential' reaching 74% by 2025 and the third ranked power, India having a 'power potential' of only 26%, the world is likely to become bipolar. What this means is that China would very likely challenge the US in the economic and geo-political context and could conceivably initiate a creeping annexation of the South China Sea. One of the key tests of the ruling Chinese Communist Party's intentions will be whether it applies to a rising India the same principles and approaches that it expects the USA, Japan and the EU to apply to a rising China. If it takes a positive approach to India's rise (e.g. on permanent membership of UNSC, founding of EAEC, NSG), then it can rightly expect the same positive approach from others.

(In seminars on China-India comparison, Chinese scholars talk about 'competition and cooperation' between the two countries, while Indian scholars talk only about 'cooperation'. No Chinese will however ever admit that 'competition' includes proliferation of wmd technology -- atomic weapons design, above 300 km range missiles -- to Pakistan).

**Partnerships, formal or informal, with a country having a large, high quality stock of strategic capital can be highly beneficial to a relatively poor country with a lower level of general technological capability and strategic assets. Such a partnership can lower the financial and time cost (for the poor country) of building strategic assets and improving their quality. The growth of strategic capital can therefore be accelerated resulting in faster rise of VIP.

**There are, thus, two hypothetical developments that can result in a tri-polar or
multi-polar world instead of a bi-polar one in 20 years. (a) It's possible for a country to achieve a level of power (VIP) that is much larger than its power potential (as measured by VIP2) through acquisiton and development of strategic technology. India's power potential of 26% in 2025 will be higher than the average power potential of the USSR (23%) from 1950 to 1990 and equal to the power potential of the Soviet virtual state in 1955 when it became the second pole in a bipolar world.

The only way India can achieve a level of strategic technology necessary for becoming a credible third pole by 2025 is through transfer of strategic technology and equipment from USA. The bold decision of President Bush to remove restrictions on the flow of commercial nuclear technology to India and to facilitate the flow of dual use and strategic technology could transform power relations in Asia and the world. Just as Nixon's opening to China did. This will be one of the decisions that marks President Bush's and Prime Minister Manmohan Singh's place in history. If followed to its logical conclusion this could raise India's actual power (VIP) way above its 'power potential' (VIP2), leading to a tri-polar world by 2025. More realistically, it could accelerate the arrival of a tri-polar world. In other words, the period of bi-polarity will be shortened, an outcome that is in the mutual interest of both USA and India.

The State Department spokesman's statement of March 25, 2005 in Washington that the USA would "help India become a world power" has a value for India if it means that the USA is willing to supply India the strategic technology to ensure that India's actual power (VIP) matches or exceeds its growing power potential (VIP2).

The US President has authorized such a statement because he perceives a strategic benefit from having a natural and stable balance of power in Asia. The US administration and think tank scholars must convince the US Congress that a more powerful India is in the vital interest of USA.

Acquisition of technology or skills from others is NOT a substitute for, but a complement to indigenous development for an aspiring global power like India. Acquisition of strategic assets (materials, equipment, technology, skills) from others must be used to (1) fill gaps and cover weakness in domestic capability; (2) speed up indigenous development of strategic assets and improve the effectiveness and quality of of strategic R&D; and (3) widen the ambit of strategic R&D into frontier areas not accessible previously. Further, the dominant power will try to reduce the flow of strategic technology from it to the potential challenger. As mentioned above, China will be strong enough to challenge US power by 2025. The US government has therefore taken steps during the last few years to stop such flows from the US, EU and Japan. In response China has been emphasizing that it is a middle-income country whose per capita income will not equal the USA's for 50 years or more.

The Virmani paper shows that as far as global power relations are concerned, the relevant comparator is either the power potential VIP2 or the actual power VIP, not the relative per capita income.

(b) Another development that can result in a tri-polar or multi-polar world around 2025 is if the emergence of China and India on the global scene forces the residents of the larger member-states of the EU to reconsider their stand on EU integration. Twenty years from now they may decide to constitute an EU government, based on direct elections by EU citizens, with complete power to act on all matters connected with international relations (defense, foreign affairs). Such an EU would be a global power. The 'power potential' of the European Monetary Union countries plus UK is currently (in 2005) a little less than 75% and is projected to decline to about 60%. However, the power potential of an EU virtual state would be about equal to that of China in 2025. (As long as the EU does not become a 'virtual state,' it is not a global power and its incentive for stopping the flow of strategic technology to China will be much lower than that of USA. On the other hand, if the EU becomes a 'virtual state', it will be a rival of China and its incentive to restrict the flow of strategic technology to China will rise sharply).

**If neither of the above two developments takes place, the world will still become tri-polar in about 30 years, with India as the weakest pole. Though the 'power potential' VIP2 of China is projected to be greater than that of USA in 30 years, its actual power VIP is likely to remain less for several decades because of the accumulated strategic assets of USA.

For the full text of the Virmani paper, please log on to

  • http://www.usindiafriendship.net
  • turn to "Most recent Viewpoints", and click: "Virmani Index of Power (VIP): Measurement of Global Power Potential of Nations".

    Cheers and a HAPPY NEW YEAR!

    Ram Narayanan
    US India Friendship

  • http://www.usindiafriendship.net
  • ***

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