Why India’s Tortoise May Beat China’s HareDr. Harry G. Broadman
(Forbes) – Market sentiment is forever fickle about economic races between countries, especially where emerging markets are concerned. Today, intense attention is focused on India’s strong growth prospects and the chance they ultimately may overshadow those of the current ‘second largest’ economy in the world–China. This may well turn out to not be a fad, and the smart money has begun to move India’s way.
It wasn’t always like this. Over the last three decades, the big debate about the role of emerging markets in the global economy first centered on whether it would be the Russian or the Chinese economic model that will prove to be the most effective in making the transition from a socialist to a market-oriented system.
Then came fascination with the ‘East Asian Miracle’, epitomized by the role of seven emerging markets–the region’s three ‘Newly Industrializing Economies’ (Indonesia, Malaysia, and Thailand) and its four ‘Tigers’ (Hong Kong, Republic of Korea, Singapore, and Taiwan).
In the aftermath of the late 1990s currency crisis, which begin in Asia and soon spread to Latin America, Russia and elsewhere, market sentiment turned its fixation toward the potential primacy of a cleverly named but fundamentally economically amorphous group of large emerging markets–the ‘BRICS’ (Brazil, Russia, India, China and South Africa). Today, the BRICS acronym has not only lost much, if not all, of whatever substantive currency it once had, but it is rapidly being dropped from the financial markets lexicon. And with good reason.
Brazil is trapped by an incoherent economic policy regime, exacerbated by a corruption scandal centered on Petrobras (the country’s leading national economic champion) that is rocking the highest levels of government; Russia remains mired in an economic policy straight-jacket and run autocratically, with the objective of ossifying the economy to remain in the same state it was more than a decade ago, excessively reliant on oil and gas, and seemingly infatuated with re-creating the Soviet Union; and South Africa, whose governance is stymied by a fundamentally dysfunctional constellation of stakeholders owing to its tortured history, has maintained its long-standing economic philosophy of protectionism—on both the international trade and domestic competition fronts—such that it is no longer the beacon of innovation for Africa nor the preferred point of entry by business to the sub-Saharan continent.
At present, the spotlight is on China and India.
Like Aesop’s Hare, China has been growing at a blazing pace for years. According to China’s official statistics (the accuracy of which has been recently questioned by even the country’s leadership), average GDP growth over 1980-2014 was 9.8 percent. Few if any other nation in modern times has come close to such an accomplishment, and there is little question about the incredible ingenuity of the Chinese. India’s GDP growth over 1980-2o14 averaged 6.2 percent–more the speed of Aesop’s Tortoise. Still, a strong performance by any standard, and certainly an enviable record for most countries around the world.
China, of course, has long been at the top of market headlines. But with its new-found ranking as the second largest economy, world attention has become even more riveted on its economic fortunes. Unfortunately, just as more people are getting an ever closer look at the country’s economy, its prospects for growth are becoming questionable. Not only has China entered into a cyclical downturn, but far more pernicious is the greater exposure to the structural contradictions that have been inherent in the country’s ‘socialist market economy’ since the early 1990s.
China’s growth has been fueled by an excessive reliance on a mercantilist strategy of providing the world with vast amounts of cheaply priced exports rather than building a large, vibrant consumer market at home. Coupling this has been Beijing’s huge—and often wasteful—investment in lumbering state-owned enterprises (SOEs), which, despite the growth of private sector firms in certain sectors of the economy, have consolidated in number and grown ever larger over time; a moribund system of state-owned ‘banks’, who pretend to lend money to SOEs, who, in turn, pretend to pay back the banks; a breathtaking infrastructure network of modern airports, highways, ports and railways, some of which operate way below capacity; and real estate, where overspending has created an untold number of unoccupied buildings and huge market bubbles.
In no small way, China’s racing endurance to date has been made possible by the dominance throughout all aspects of the economy of the Communist Party, and questioning the Party’s aims is not tolerated. In this setting, it is understandable why the uppermost goal of the Chinese leadership is to maintain the country’s social stability, including through the controlled growth of the population. However, now as the growth of the nation’s labor force has begun to shrink and the average age of the population is increasing, China’s wages have risen to the point where other countries—including India—are becoming more competitive.
In part because of China’s faltering, the progress of Indian economic reform is now front and center, with a debate about how in the years ahead the trajectory of India’s economy will stack up against China’s. Indeed, the intense draw of India to business headlines around the world has been the country’s strong macroeconomic growth performance in the past few years, especially when compared with China. New IMF data indicate that not only did India’s rising real GDP growth rate catch up with where China’s growth rate had decreased to in 2014–7.3 percent–but they project that as China’s growth rate continues to decline–to 6.8 percent in 2015 and then decrease further to 6.3 percent in 2016—India’s growth rate will substantially exceed China’s over the same period, reaching 7.5 percent in 2016.
Of course the heightened attention recently given by the business media to India in no small way has been propelled by the political ascent in May 2014 of Narendra Modi as Prime Minister, who is seemingly intent on ushering in a watershed of modern economic reforms aimed at enhancing the country’s business environment, developing the nation’s infrastructure, and building a talented workforce.
As the largest democracy on the planet, the management of India’s economy has been messy—to say the least. For decades, attempts at deriving consensus on the most critical issues of reform have been largely elusive. As a result, fiscal, monetary, regulatory, trade and investment policies have often blunted rather than reinforced market incentives. Governance has been extremely weak, and investment in new, or even in the maintenance of existing, infrastructure facilities has long been wanting. And employment, education and health care are often out of reach for large portions of the population, owing in part to the country’s caste system.
Modi’s multi-faceted agenda is the most promising in years, with a focus on transforming the country into a global manufacturing hub, bolstered by investments in education and infrastructure, and incentives for foreign companies to manufacture in India. In a very real sense, his program almost represents a 180 degree turn on multiple decades of misdirected policies.
In all that has been written in the past year and a half on the economic race between India and China, there is a dirty little secret: there’s actually much less in common between the two countries than conventionally thought. Indeed, beyond their records of rapid economic growth, the greatest similarities are the fact that both are: geographically large; heavily comprised by relatively homogeneous ethnic groups; populated by large swaths of people living below the poverty line; and each home to about 20 percent of the world’s population.
Beyond that, however, there are significant differences.
The most notable to take into account when assessing these countries’ economic destinies concern the prospects for international integration, which is key for any country to strengthen its global competitiveness; improve its access to external (as well as the domestic generation of) advances in technology and innovation; and enhance both the efficiency of its enterprises and the acumen of its business leaders and public policy decision-makers.
To this end, at the most fundamental level is the striking contrast in the structural composition of each nation’s economy. In China, reflecting the country’s still heavy, indeed actually growing, reliance on fixed investment—rather than a shift towards consumption, as habitually embodied in the Party’s formal pronouncements to the contrary—as a share of GDP the industrial sector comprises 44 percent and the services sectors account for 46 percent (with the balance occurring in agriculture). By contrast, in India, industry accounts for 24 percent, while services comprise 58 percent, illustrative of the country’s emphasis on development of human capital, the key intangible asset needed for economic success in today’s globalized marketplace.
In the sphere of international trade, India’s economy is actually more extensively integrated into the world’s trading system than China’s. No doubt this will be a shock to most observers, since China’s global share of exports of goods and services is about five times as large as India’s. The problem with that perspective is it does not adjust for the differences in the scale of output between the two countries: China accounts for about 17 percent of the world’s GDP, whereas India’s output constitutes about 7 percent.
Measured correctly, while India’s total trade in goods and services (that is, the sum of exports and imports) accounts for 50 percent of the country’s GDP, for China, the comparable measure is only 42 percent. Perhaps even more important is that for exports alone, they actually constitute a larger share of GDP for India than they do for China.
The story is remarkably similar in the case of foreign direct investment (FDI), where, by committing to significant, tangible ownership of in-country productive facilities (rather than as a minority, passive shareholder), external investors vote with their feet and wallets as to the economic prospects of an economy. Indeed, despite China attracting annual FDI inflows twelve times India’s volume, it is striking that as a share of each country’s GDP, the cumulative flows of FDI into India today is 12.3 percent, whereas for China the analogous figure is 10.5 percent.
But perhaps even more telling of each country’s economic racing endurance is how well their homegrown businesses fare in establishing and operating competitively in foreign markets. Over the last decade, even though Chinese firms pursued significantly fewer acquisitions or greenfield investments in the G-20 countries than did Indian businesses, China’s enterprises were only able to successfully complete about 50 percent of their proposed transactions, whereas India’s firms successfully closed on almost 70 percent of their deals. No doubt the differences in these track records are due, perhaps in large part, to the fact that the typical Chinese firm is a state-owned enterprise, while most Indian firms are in the private sector.
Of course, many factors will impact how this economic race between India and China turns out. Needless to say, in a very real sense it is just beginning. And who might look like the winner today may well not be the first to cross the finish line. In the end, however, as has always been the case throughout the world’s economic history, it will boil down to human capital. It will not hurt India that one of its main assets propelling it forward is youth: India’s median age is 27, compared with China’s 37. Unless China’s recent lifting of its one-child policy has a dramatic effect, by 2030 India’s population will exceed China’s, with an additional 300 million included in its labor force. By that time, no matter how fast China is able to sprint, as long as India adopts a slower yet steadier pace, coupled with continual enhancement of the talent of its people through greater investment in the entire population’s education, it will likely win.