# 1. Introduction

In 1980, China and India accounted for 2 percent of global output, and the remaining low and middle income countries made up 16 percent of world GDP. By 2005, the contribution of China and India nearly quadrupled to 7 percent of global production, while the share of other developing countries declined to 15 percent. The growing importance of developing economies can thus be largely explained by the economic expansion of China and India. In the future, the increasing level of China and India’s integration with the global economy, combined with sustained high growth, is likely to further cement their position as an important engine of global development.

This paper explores the potential consequences of sustained economic expansion in China and India by considering the effects the two emerging giants are likely to have on global trade, structure of production, and the distribution of income. While growth rates in China and India are likely to decelerate in the future, their growth path will still outperform growth outcomes of most other countries. Not only are these developments likely to drive convergence of per-capita incomes at the global level; they are also a key force behind the expected entrance of millions of Chinese and Indian consumers into the global middle class—a group of people who can afford, and demand access to, the standards of living previously reserved mainly for the residents of developed countries. Growing demand for goods is likely to boost trade in manufactured products but also raise demand for highly skilled workers. This implies that the rules of the global marketplace will be increasingly determined by the preferences of citizens of China and India, and pressures for policies favoring global integration are thus likely to increase in the future.

An outstanding growth performance of relatively poor and highly populated countries like China and India signifies a reduction in the number of poor around the world and a decline in global income disparities. Nevertheless, as it is shown by Chaudhuri and Ravallion (2006), fast growth in China and India is characterized by high urbanization rates and growing demand for skills, both of which resulted in deteriorations in the distribution of income within these countries. These apparently opposing distributional effects highlight the importance of analyzing global disparities taking into account income differences not only between national states but also within them. The definition of global income distribution used in this study captures income differences between all the citizens in the world; we may think of the resulting global inequality as showing the income differences that would prevail if the world was seen as a single country. The concept of global income distribution becomes increasingly relevant as people’s perception regarding their relative position in society is no longer based solely on a national yardstick, but it is influenced by the increased awareness of living standards of people around the world (Milanovic, 2006). On the other hand, within-country distributional changes should not be disregarded since economic policy is still decided and implemented at the national level.

The empirical results of this paper are produced with the World Bank’s LINKAGE global general equilibrium model and the newly developed Global Income Distribution Dynamics (GIDD) tool. GIDD is a framework for ex-ante analyses of the distribution 2