By Xavier Forneris.
Among the “BRICS” – a group of leading emerging economies comprised of Brazil, Russia, India, China, and South Africa – two countries stand out for their large population (of well over 1 billion each), rising economic clout and rapid growth: India and China, or Chindia, as the pair is now known. An Indian politician, Jairam Ramesh, Minister of State for Commerce, Government of India, claims to have coined the term Chindia in 2005 to evoke the simultaneous rise of China and India and their fierce competition for global economic dominance. Yet, the countries could not be more different. Even their focus seems to be placed on different objectives. While India’s energy appears concentrated on outpacing China’s rate of growth, China seems intent on capturing the title of “top global economic power” from the U.S.
At this stage, I have to put a few numbers on the table, just give a sense of the relative size of Chindia’s economies to the rest of the world. Please don’t sue me over these numbers. Depending on the source and method used to compute GDP, the numbers and relative positions in the ranking can vary. This particular dataset is from the World Factbook.
We’re a culture fascinated with ranking and benchmarking, so let me indulge by giving you the “Top 10”, ie., the 10 largest economies in 2011 (by Purchasing Power Parity – or PPP- GDP):
|| 312 million
|| 128 million
||$ 4.31 trillion
||$ 4.06 trillion
|| 82 million
||$ 2.94 trillion
|| 143 million
||$ 2.22 trillion
|| 62 million
||$ 2.173 trillion
|| 192 million
||$ 2.172 trillion
|| 66 million
||$ 2.145 trillion
|| 61 million
$ 1.774 trillion
We can see that China’s economy is not very far behind the US, and that India’s economy is already larger than Germany’s or Russia’s, but still less than half the size of China’s.
Several economic projections I saw suggest that India and China are likely to become the two largest economies by 2050 and that China should seize the top spot (overpassing the US) around 2017-2020.
I thought it would be interesting to compare the two giant countries, India and China, in an effort to determine whether one is best positioned than the other for future global leadership. But I will not compare their growth rates. Like Amartya Sen, the Indian Nobel Prize in Economics, I find the debate on which of the two countries has the higher growth rate a little silly. Both countries still face many challenges incluing access to education and health, infrastructure, and inequality.
The size of the domestic market and the relatively low-cost labor are well known commonalities. A more strategic one is their thirst for resources. Both India and China will require enormous resources to fuel their growth and feed their enormous population. The demand for natural resources (such as as oil, gas, coal, copper, bauxite, aluminum, iron and steel) but also for industrial equipment and food products will be here for a long time; and they also create opportunities for developing countries that produce these resources. Africa, for instance, has become a more important source of natural resources for China. As the global resource pool is finite, this thirst from resources will inevitably create tensions with Europe and the U.S. A second less discussed commonality is the emergence of Chinese and Indian MNC’s as global players and even global leaders. From FDI-importing countries (China more than India), the two nations have become sources of FDI.
India is a democracy, perhaps not a Jeffersonian one, but a democracy nevertheless. China is generally considered as less advanced and open politically than India. There are, however, clear advantages to the discipline that China can impose to its population and bureaucracy. Implementing deep policy reforms or massive infrastructure projects is easier in an autocratic regime than in a Western-style democracy where all sorts of resistance may impede the process. But it would be a mistake to think that everything gets decided in Beijing by a handful of leaders.There is in China an increasing involvement and participation of local levels of government in decision-making, which explain why the Chinese political system is often described as one of “pluralism within a single party system”.
The economic models are also very different. India’s model relies on the private enterprise whereas China practices a form of “State Capitalism”, with strong government backing of large state-owned enterprises (SOEs). At some point in their development, companies such as Haier, Lenovo, China Development Bank, China Mobil, Petro China, among others have all benefited from this strong government backing. Even a fully private company such as the telecom infrastructure giant Huawei – which I had the opportunity to visit in Shenzhen – seems to have benefited greatly from its close ties to the Chinese government. And its ownership structure remains quite opaque.
China has significantly better Infrastructure and logistics than India and has made a very smart use of the “Special Economic Zones” (SEZ) to develop certain provinces or districts and test economic reforms before extending them to the entire nation. Shenzen is one example of such utilization of SEZ status.
China’s economic growth is largely driven by FDI, exports, and manufacturing; whereas India’s growth seems driven by domestic consumption, capital markets, and IT/Services. I often hear that “if China is the world’s workshop; India is its back-office”. As convenient as this statement is, it is a bit of an over-simplification. The services sector is rapidly developing in China and, conversely, India’s economy can not be reduced to outsourcing.
Demography, on the other hand, is an area where India seems to have a significant advantage over China. China’s population is rapidly aging. This could cause its impressive rate of economic growth to reach a plateau, as has happened in Japan and several European nations. Although China’s fertility rate has been below replacement level for almost 20 years the “One Child policy” is still in place. But this might be changing; I was told that the Shanghai province would have renounced this policy and would already be encouraging couples to have more than one child. Yet, some demographic studies suggest that China’s work force will peak in absolute terms in only 4 years before dropping. In contrast India is a much younger nation. According to demographic studies cited in a JP Morgan Chase study (2007), 58% of the Indian population will be under 29 years old by 2015 vs. only 33-35% in China. This is a significant difference and, again, this one seems to favour India.
Finally, the integration of local firms into the “global business world” should also occur very differently. It is reasonable to assume that India’s businesses will be more easily integrated in the global economy, through large acquisitions of eminent “Western” companies with the technology, the manufacturing capability, and the other assets that Indian companies need. Suffice to cite the acquisition of Arcelor by Mittal Steel or of Corus Steel by the Tata group, among many other large-scale acquisitions of Western firms by Indian companies. In contrast, Chinese companies are facing more obstacles in in their attemps to acquire foreign companies, particularly in the U.S and when technology or intellectual property rights are involved. Several attempted Chinese acquisitions failed because of strong political resistance. Two examples are Haier’s attempt over Maytag and CNOOC’s plan to acquire Unocal. This last argument is not without flaws: a case in point being Lenovo’s success in acquiring IBM’s PC division. But a commonly held view among many observers of Asian business is that growth for Chinese companies will be more organic and will come less from international acquisitions than would be the case for Indian companies.
Given the two countries’ impressive growth and enormous markets, there is little doubt in my view that Chindia will play a central, expanding and perhaps or probably dominating role in the global economy. But I will not go as far as some who declare that “The West is finished”, a form of “neo-Spenglerism” thinking. And I also think that the focus on growth rates in the two countries is excessive and probably misplaced. Economic history shows that growth can not last for ever and, as the adage goes: “The bigger the booms; the more spectacular the bubbles and devastating the busts”. Also, both countries would be wise to pay more attention to the quality of the growth, how to reduce the inequality gap, and how to improve access to education and health, transparency, and the environment. All these things are needed for sustainable growth.
Amartya Sen’s sentiment about the excessive focus on growth rate was well summarized in a recent FT article: Is India growing faster than China? Financial Times, April 18, 2011. See: http://blogs.ft.com/beyond-brics/2011/04/18/is-india-growing-faster-than-china/
Jairam Ramesh, “Making Sense of Chindia: Reflections on China and India” (India Research Press, New Delhi; May 2005)
On Spengler: http://en.wikipedia.org/wiki/Oswald_Spengler