The future power of Chindia

01.01.06 Publication:

People who follow the course of world politics and economics often disagree on many things. But these days there is one thing most do seem to agree upon: that China and India are on the move, and that these Asian mega-countries will be the great powers of the future. That notion has even produced a new word, “Chindia”, intended to convey the combined effect of the elephant and the dragon. And along with that view  comes another: that China, the one-party dragon state, is likely to lead the way, growing faster and becoming more powerful than democratic, muddled, elephantine India. Moreover, China´s growth will lead it to dominate the world´s manufacturing business, while India´s will lead it to take over a lot of services, especially software programming and many “business processing” tasks.

            All sorts of things could bring the rise of either China or India, or both, to a halt. Political instability is the likeliest, in both cases. But suppose, for the sake of argument, that they do continue to grow at current levels. What might be the effect, during the next ten years?

            Well, arithmetic helps in answering that question. If India keeps on growing at its latest rate of 7-8% increases in GDP each year, then its economy will double in size within ten years. If China continues at its current 9%-plus rate, its economy will double in less time than that, about eight years. But that doesn´t tell us very much. The important question to ask is what would have to change to make such continued, sustained high growth possible. And the answer to that is that both countries would have to look quite different at the end of the period than they do now, if they are to sustain such rates of growth.

            The reason why this is the case is that large elements of both countries recent growth cannot in fact be sustained. Something has to change. In China´s case, growth has been driven by a big increase in both exports and imports. But that has produced a shape for the economy which is very unusual for such a large, continental economy: it is one in which trade (ie, exports plus imports) are equivalent to 80% of GDP. The figure for Japan is about 25%; that for America is about 30%.

            What this tells you is that the future is likely to be different from the past: growth cannot go on being driven by rises in trade for ever. Domestic demand will have to take the lead, at least for several years. For that to happen, however, services such as banking will have to be reformed and opened up to more competition and new investment, a process which has begun this year. The implication is that old, state-owned companies, which have been supported by compliant, politically controlled banks, will have to be allowed to go bankrupt or be sold off. That will be politically painful.

            In India´s case, the sector that has become famous for bringing growth—information technology—is simply not big enough to drive growth for long. Even though lots of multinational companies have moved data processing and other services to India, that sector accounts for a mere 4% of India´s GDP and involves less than a million people, in a country with a population of over one billion. Moreover, the whole economy is strangely unbalanced. Whereas in China industry is the biggest producer, accounting for more than 50% of GDP, in India the biggest producer is services (mainly trade, travel, banking, domestic servants and so on), which accounts for more than 50% of GDP. Industry such as manufacturing accounts for a mere 25%.

            The result is that to achieve sustained growth of 7-8% a year over ten years, India needs to change: it needs to become a bigger manufacturer. That in turn requires huge amounts of investment in infrastructure such as ports, roads and airports, to make the movement of manufactures from factory to consumer much cheaper than today. Indian factories can match Chinese costs today, thanks to low wages and abundant labour. But transport costs destroy Indian competitiveness.

            That process too has begun. It is too slow, but it is happening: new roads, ports and airports are steadily being planned and built. Alongside that, Indian companies are starting to emerge in manufacturing businesses such as cars, steel and food processing. Last year, in fact, manufacturing output grew more rapidly than the economy as a whole, at 9.2%, and more rapidly than services.

            The point is this. Great countries such as India and China cannot grow rapidly without also changing rapidly. So our assumptions about what they will look like in ten years´ time cannot be based simply on extrapolating trends forwards, in a straight line. Probably, by then, India will be a much bigger manufacturing power, with more of its economy devoted to trade. China will have expanded its services and its domestic demand, and will probably have reduced the role of trade in its economy.

            But will they work together, to lead Asia and perhaps the world? That is what many people want to know. Right now, contacts between them are strikingly small. There are only six flights a week between India and China, which is fewer than the number each day between Shanghai and Bangkok alone. Trade between the pair is growing, but from a low base. If the future unfolds in the manner I have described above, I would think that trade between the two will increase, though not hugely: both will continue to see their main markets for manufactures elsewhere. Already, they are co-operating in the development of oil and gas supplies, such as in Sudan and Iran. Their interests in that matter clearly overlap.

            Beyond that, however, I would doubt that these two vast, proud and ancient countries will see each other as natural partners. They are either likely to ignore each other, seeking to dominate their immediate neighbourhoods, or to become active rivals. And there will be another great power rivalling China too: Japan. Asia does not promise to be a very harmonious, “Chindia” sort of place. Rather, it will be a hotbed of rivalry and intrigue. That will be good for us journalists, at least.